Guide to Declaring Royalties

 

 

As China's external technical service trade expands rapidly, international technology transfers account for a growing share of cross-border trade. The licensing methods, amounts, and transaction models for royalty fees are becoming more diverse and complex, making the compliant declaration of taxable royalty fees a key concern for both businesses and customs authorities. Let's take a look at how to declare taxable royalties for imported goods.

I. What Are Royalties?

A "royalty fee" is a payment made by the buyer of imported goods to the owner of intellectual property rights-or to the owner's authorized representative-for the licensing or transfer of patents, trademarks, proprietary technologies, copyrights, distribution rights, or sales rights.

—From the Measures of the Customs of the People's Republic of China for Determining the Dutiable Value of Imported and Exported Goods (GACC Order No. 213)

Theory alone can be shallow; in actual foreign trade, companies pay many types of royalties to overseas parties. So, in which cases must these royalties be declared and taxed by customs?

Let's think about the following questions:

Q1: Company A purchases a patented machine from foreign Company B at a price that excludes patent fees. However, Company B requires Company A to pay a patent fee to foreign Company C, which owns the patent rights; otherwise, Company A cannot buy the machine. Should this patent fee be included in the actual or payable price of the imported goods?

Q2: Company A acquires the trademark rights for Product C from foreign Company B. Product C is manufactured locally by Company A using domestic equipment and raw materials. Company A pays an annual trademark fee to Company B based on Product C's domestic sales. Is this fee subject to import-related taxes?

II. Conditions Under Which Royalty Fees Are Taxable

Royalty fees are taxable only when both of the following conditions are satisfied:

01 They must be related to the imported goods

If any of the following conditions apply, the royalty fee is considered related to the imported goods:

(I) The royalty fee is for patents or proprietary technologies, and the imported goods fall under one of the following categories:

1. They contain patented or proprietary technology;

2. They are produced using patented methods or proprietary technology;

3. They are specifically designed or manufactured to implement a patent or proprietary technology.

(II) The royalty fee is for trademark rights, and the imported goods meet one of the following conditions:

1. The goods already have a trademark attached;

2. They can be sold immediately after the trademark is attached post-import;

3. They include trademark rights at import, and require only minimal processing to attach the trademark before being sold.

(III) The royalty fee is for copyrights, and the imported goods meet one of the following conditions:

1. Goods that include software, text, music, images, or similar content, including tapes, disks, CDs, or similar media;

2. Goods that contain any other copyright-protected content.

(IV) The royalty fee is for distribution rights, sales rights, or similar rights, and the imported goods meet one of the following conditions:

1. They are ready for sale immediately after import;

2. They can be sold after minimal processing.

02 They must constitute a condition for selling goods within the domestic market.

If the buyer cannot acquire the imported goods without paying the royalty fee, or if the goods cannot be sold under the contract terms unless the buyer pays it, then payment of that royalty fee is regarded as a condition for domestic sale of the imported goods in the People's Republic of China.

Returning to the opening questions, here are the answers:

A1:Because the patent fee is a condition for the sale of the goods and is directly related to the imported goods, it must be included in the actual or payable price of the imported goods.

A2: Since the royalty fee is not related to the imported goods, it is not subject to import-related taxes or fees.

03 How to Declare Royalty Fees

When importing goods, companies may have already paid some royalties, may owe others, or may pay them on a recurring basis. So how should they be declared to customs?

(I) Common reporting requirements

When completing the customs declaration, if there is a taxable royalty fee-regardless of whether it is included in the actual or payable price of the imported goods-you must select "Yes" in the "Royalty Fee Payment Confirmation" section. If no taxable royalty fee exists, select "No".

Export goods, processing trade goods, and bonded goods under customs supervision (excluding bonded goods sold domestically) are exempt from these reporting requirements.

(II) Distinctions in reporting

1. If the royalty fee has been paid before importing the goods, enter the amount under the "Miscellaneous Fees" section of the customs declaration. There is no need to include it in the "Total Price".

2. If the royalty fee has not been paid at the time of import, you must file the declaration and pay any taxes within 30 days of each payment and complete the Taxable Royalty Fee Declaration Form. On the declaration form, select "9500" for "Supervision Method". Under "Goods Name", enter the name of the originally imported goods. Under "Commodity Code", enter the code for the originally imported goods. For "Legal Quantity", input "0.1". For "Total Price", input the amount of the royalty fee paid each time. For both "Gross Weight" and "Net Weight", enter "1". (See GACC Announcement No. 58 [2019])

 

 

 

 

 

IV. Consequences of Failing to File Accurate Declarations

If you underpay or fail to pay taxes by neglecting to complete the "Royalty Fee Payment Confirmation" field as required, or if you do not declare and pay royalties on time, customs may charge a daily penalty of 0.05% of the underpaid or omitted tax. The actual penalty will be based on the special late fee payment notice issued by the supervising customs authority.

V. Tips

1. Filing supplementary taxes for declared royalty fees involves substantial documentation and complex calculations. Be sure to prepare all required materials well in advance to avoid late submissions.

2. If the royalty fee is paid before the goods are declared, the tax is calculated using the applicable tax rate and exchange rate on the date customs accepts the declaration. If the royalty fee is paid after the goods are declared, the tax is calculated using the applicable tax rate and exchange rate in effect on the date the royalty fee is declared and paid.

3. The royalty fee payment date is determined by the date on the bank-issued receipt (or debit note).

 

 

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Disclaimer：The above content is translated from Chinese version of this website. The Chinese version shall prevail.