Primary considerations for an intellectual property holding company in China

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(Author: Dr. Jian Xu, the China IP Blogger)

Is an IP holding company desirable and, if so, whether it should be based in China or elsewhere (taking into consideration legal and tax issues)?

1. Legal structure of the IP holding company

As intellectual property rights are one of the most important business assets, it is advisable to have full control of the IP holding company. Thus, for the purpose of holding all Chinese IP, the legal structure of the IP holding company should be a WOFE (Wholly Owned Foreign Enterprise) in China under full control of the parent company.

2. Pros and Cons of the IP holding company

a. The main advantage of an IP holding company is the efficiency of IP management, especially if there is or will be a significant IP portfolio. The Chinese IP holding company can centrally plan and manage the IP filing and enforcement strategy in China, and negotiate and streamline IP licences to third parties. In addition, as the IP is owned by a Chinese entity, the formality requirements are minimal during filing, licensing and enforcement. For example, notarisation or legalisation of formality documents is not needed for a Chinese entity but is compulsory for a foreign entity.

b. Other advantages of an IP holding company include: a) dedicated personnel exploiting and maximizing the value of the IP assets; b) accurate measuring of IP expenses and related income for decision making; and c) protecting the IP assets from the parent company’s creditors & liabilities and averting hostile take-overs.

c. The tax perspective of an IP holding company is unclear. China is neither a high tax nor a low tax country. Remitting profit out of China is not as easy as in western countries. For now, it’s safe to assume that tax is not the major reason for companies to consider setting up an IP holding company in China. Traditional IP holding companies are set up in low tax states/islands for royalty reasons but China is not a choice for such a purpose. If China IP-related tax is a key concern, it is suggested that you have specific meetings to understand the issues and inviting Chinese tax specialists for input as well.

The overall advice is that it is advantageous to let the WOFE in China to hold Chinese IP but under the full control of the parent company. Whether or not a “pure” IP holding company is desirable is to a large extent dependent on the company’s commercial aims, structure, and operations in China.