China's Technology Transfer Rules: A Stop Along the Path to High-New-Tech Enterprise Status

MNCs may, as a result, have to rethink their IP ownership and licensing structures if they wish to obtain High-New-Tech Enterprise (HNTE) status in China. To qualify for the HNTE tax incentive, enterprises must meet a stringent set of criteria. The focus of this article is on the requirement that enterprises hold proprietary IP rights associated with the core technology of their main product or service. In addition, the IP rights must have been obtained within the most recent three years by their own R&D, transfer, donation, merger, or by an exclusive license with a term of more than five years. In other words, an application for HNTE status may be based on actual ownership of the IP or exclusively licensed IP for a term of over five years — which raises technology transfer issues in China.

The technology transfers that MNCs are contemplating to undertake with their local Chinese entities in order to meet the ownership criteria for HNTE status may be considered technology transfers into China (imports), which are subject to China's technology transfer regulations. MNCs must consider a series of laws and regulations such as the Contract Law of China (Contract Law), which sets out the basic principles applicable to technology-related contracts, the Administration of Import and Export of Technologies (Technology Transfer Regulations), the Administration of Registration of Technology Import and Export Contracts Measures, the Catalogue of Technologies Prohibited or Restricted from Import, and related Supreme Court opinions regarding technology contracts.

Under the Technology Transfer Regulations, technology is divided into three categories: freely transferable, restricted and prohibited technology. The category under which a particular technology falls, depends on whether it is for import or export; therefore a technology that might be prohibited from import might at the same be free for export.

Technology classified as prohibited from import may not be imported; restricted technologies require approval from the Ministry of Commerce (MOFCOM) and the Ministry of Science and Technology before the technology transfer contract is enforceable; and freely transferable technology transfer contracts require registration (rather than approval) with MOFCOM (or its local branch) but are still effective upon proper execution. However, certain restrictions are prohibited as a matter of public policy and certain unreasonable restrictions on the transferee's use of the technology in cross-border transfer contracts can be held invalid. Since the technologies under contemplation for transfer for HNTE purposes will likely relate to freely transferable technology, we will discuss what types of terms to avoid when structuring cross-border technology transfer contracts.

The registration authority may require an agreement to be amended before registration, if certain restrictive clauses are included. The Contract Law stipulates that a technology-related contract which illegally monopolises technology, impedes technological advancement or infringes another's technology is invalid. Terms that may be interpreted as illegally monopolising technology or are prohibited will be detailed below.

In licensing core technology in intercompany transfers (as would likely be the case under our HNTE scenario), the licensor would unlikely restrict the subsidiary from making improvements. However, headquarters may require that it exclusively own, jointly own, obtain an assignment, or use for free the improvements made by the licensee based on the licensed technology. These restrictions raise monopoly concerns and are considered to impede technological advancement. Restrictive clauses such as these are prohibited if there is no reasonable consideration given in return. That is, there must be reciprocity.

Terms that restrict one party from obtaining from other origins technology similar to or in competition with the technology transferred is prohibited.

Terms must not require the transferee to accept conditions that are dispensable to the technology import, such as purchasing unnecessary technology, raw materials, products, equipment or services.

Requiring the transferee to pay royalties or assume certain obligations for using technologies of expired or invalid patents is prohibited.

Restrictions on recipients of technology with respect to the following are not prohibited altogether but must be reasonable:

• procurement channels such as sources from which the transferee may purchase raw materials, spare parts, products or equipment;

• the product quantity, type and price of the products of the transferee;

• sales and export channels of products produced using the licensed technology.

How “reasonable” would be interpreted depends on the technology itself, the court or authority, and the extent to which the clauses are reciprocal in nature.

As part of any MNC's internal planning with respect to attaining HNTE status, it needs to contemplate various Chinese laws and regulations scattered through the Contract Law, Supreme Court interpretations, technology transfer regulations and other administrative measures. In drafting contracts to maximize the benefit of a transfer, MNCs should seek the advice of local counsel to guide them through the technology transfer process.