China simplifies the legal formalities for technology import and export

China

Overview

China has long regulated the import and export of technology. As early as May 1985, the PRC State Council introduced a regulatory framework laying down an approval system for technology import contracts and stipulating detailed rules for the examination and approval of such contracts. These regulations also imposed a number of important restrictions on the content of contracts and were largely seen as trying to improve the position of less experienced PRC licensees of foreign technology. In 1996, a "registration" system was introduced to relax the rigid nature of the approval system created under the 1985 Regulations. In practice, however, the "registration" system proved not to be substantially different from the old approval system, in that registration was still a precondition for the effectiveness of an import contract and the Ministry of Foreign Trade and Economic Co-operation (MOFTEC) still claimed a discretionary power to review contract terms.

In recent years, the Chinese government has appreciated that neither the 1985 approval system nor the 1996 registration system meets the need of China's economic development. Hence, in December 2001, a new regulation titled "Regulations of the PRC on the Administration of Technology Import and Export" (the "New Regulations") was promulgated, which make a number of significant changes to the old regime. These New Regulations became effective as from 1st January 2002.

The Scope of application

The New Regulations apply to the transfer of technology from overseas to China or vice versa. Technology transfer may take one of the following forms, no matter whether the transfer is effected by way of trade, investment or technological cooperation.

  • Transfer of patent right
  • Transfer of the right to apply for a patent
  • Licence to implement Patent licensing
  • Transfer of know-how
  • Technical services; or
  • Transfer of technology through other means, e.g. through import and export of complete set of equipment, high-tech products and production lines, co-design etc.

Categories of technologies

Under the New Regulations, imports and exports of technology are grouped into three categories, namely (a) free; (b) restricted; and (c) prohibited.

The MOFTEC publishes lists of restricted and prohibited technologies from time to time. Any technologies not included in those lists are treated as falling within the free category. In December 2001, MOFTEC and the State Economic and Trade Commission jointly issued the first batch of technologies whose import or export is subject to prohibition or restriction. There may be a few to follow thereafter.

New system for import or export technology contracts

Free Imports or Exports: Registration

For import or export of free technologies, government approval is no longer a precondition for the effectiveness of the contracts. Parties to a contract for the import or export of free technologies may now agree on that the contract will come into force on execution.

Registration for a free import or export contract can be completed within 3 working days after MOFTEC or its local delegate receives all necessary documents. Documentation includes formal application for registration, a duplicate copy of the relevant contract and documents evidencing the legal status of the contract parties. On-line registration is also available.

Upon registration, a registration certificate is issued to the applicant. The registration certificate is critical. This certificate is required to be presented when the Chinese importer or exporter deals with foreign exchange, banking, tax and customs formalities for payment under the contract. Without a valid registration certificate, Chinese licensees may not obtain foreign exchange at the banks for payment of any royalties due under the contract.

Restricted Imports or Exports: Licensing

A formal licence is required for the import and export of restricted technologies. Contracts for the import or export of restricted technologies must be conditional on the issuance of the import or export licence from MOFTEC or its local delegates.

To obtain a licence, an applicant normally needs to go through a two-phase approval process:

Step 1: An applicant needs to apply to MOFTEC or its local delegates for a letter of intent for the grant of a licence (which is in fact a preliminary approval) before it enters into any import or export contract.

Under this phase, MOFTEC (or its local delegate) normally needs 30 working days after the receipt of all necessary documents to examine, and decide on whether or not to approve an application.

Step 2: An application must be made for a formal licence after the parties signs the import or export contract. A copy of such a contract must be lodged with MOFTEC (or its local delegate) in support of the application.

The MOFTEC (or its local delegate) normally needs 10 working days (in the case of import) or 15 days (in the case of export) to decide on whether or not to issue a licence.

For applying an import licence, the two steps illustrated above can be combined by submitting a signed contract and other relevant documents to MOFTEC (or its local delegate).

Likewise, obtaining a licence for import or export of restricted technologies is significant for foreign exchange, customs declaration and tax purposes.

An Exception - Use of Technologies As Capital Contribution

In respect of foreign-funded companies in China, a foreign investor may contribute technology rather than cash or other means to the investee company as capital. In these circumstances, a different approach is adopted for the import of such technologies. The import will be examined or registered simultaneously with the examination and approval procedures for the establishment of the investee company.

Under this approach, a technology import contract is submitted to the authority together with the other constitutional documents of the company-to-be-established (e.g. joint venture contract). The import contract is approved simultaneously with the approval of the establishment of the company.

In lieu of a registration certificate or a licence, a letter of reply issued by MOFTEC (or its local delegate) approving the establishment of the enterprise with reference to the technology contract would suffice to document the approval of the technology contract. Where the reply has no reference to the technology contract, a confirmation letter issued by MOFTEC together with the reply will suffice to document the approval.

In these circumstances, the letter of reply or a confirmation letter should be used for foreign exchange, customs declaration and tax purposes.

Other Changes

Apart from the new registration or licence system, the New Regulations have in many other aspects relaxed the government control on the import or export of technologies.

Under the old system, the term of a technology import contract cannot exceed 10 years unless a special approval was obtained from MOFTEC (or its local delegates). This has now been eliminated. The old requirement that the obligation of confidentiality should normally not exceed the term of the import contract has also repealed. Contract parties may now agree on the term of confidentiality without government interference.

Like the 1985 Regulations, the New Regulations also contain a list of clauses that may not be included in an import technology contract. These include any clause

  • requiring the licensee to accept ancillary conditions that are not absolutely necessary for the importation of the technology, including the purchase of technology, raw materials, products equipment or services that are not necessary
  • requiring the licensee to pay royalties or to undertake relevant obligations for the technology after the expiration of the validity of the patent or after the declaration of invalidity of the patent;
  • restricting the licensee from making improvements to the technology provided by the licensor or restricting the licensee from using improved technology;
  • restricting the licensee from acquiring from other sources technologies similar to, or competitive with, the technology provided by the licensor;
  • unreasonably restricting the channels or sources from which the licensee buys raw materials, parts and components, products or equipment;
  • unreasonably restricting the quantity, type or sale price of the products manufactured by the licensee; and/or
  • unreasonably restricting the export channels of the products manufactured by the licensee with the imported technology.

Generally, the new list of restrictive clauses is less stringent than its equivalent under the 1985 Regulations. For instance, under the 1985 Regulations, a technology import contract could not contain a provision preventing the Chinese party from using the imported technology after the expiration of the contract in question, unless a special approval is secured. This prohibition has been eliminated under the New Regulations. Parties to a contract may now negotiate on the terms for the continuous use of the imported technology after the expiry of the contract. In some other cases, a "reasonableness" test is now applied to a number of provisions that used to be absolutely prohibited under the old regime, which means that reasonable restrictions are now permissible in certain circumstances, e.g. reasonable restrictions on Chinese importer's ability to procure raw materials, parts and components and equipment; the quantity, type or sale price of the products produced by the Chinese importer and on the export channels of the products manufactured by the Chinese importer are now allowed.

Clarification needed

While the New Regulations, in a number of aspects, improve the system for the free trade of technology, there are still some issues left for clarification. For instance, in relation to the restrictions on the procurement of raw materials, parts and components and equipment; the quantity, type, sale price and export channels of the products using the imported technologies, it is unclear what is the test for ascertaining the reasonableness. It seems guidelines are needed.

More confusingly, as an import contract for free technologies is allowed, under the New Regulations, to take effect from the execution, it is unclear whether MOFTEC (or its local delegates) has discretional power to decide that any provisions of the contract are invalid on the grounds that they contain restrictive contents.

For more information, please contact Luke Filei on [email protected] or + 86 21 628 96363.