Managing IP as a

Business Asset
WWW.CHINA-IPRHELPDESK.EU

1 Manage Return on
Investment and Improve
Performance
2 Provide Security for
Financing
3 Taxation
4 Structuring Business
Arrangements in China
to Protect IP Assets
5 Drawing Up an IP Strategy
6 Components of an IP
Strategy

For free, Checklist of Practical

Steps/Considerations
confidential,
business-focused For most businesses, intangible assets Understanding the financial value to
IPR advice within represent more than 50% of the value the business of specific IP assets is of
seven working days of the enterprise. The most significant particular importance when moving into
group of intangible assets are those a new market product or geographic
E-mail:
protected by intellectual property such because there will be new risks as well
question@china- as inventions, designs and brands. as opportunities.
iprhelpdesk.eu Since they form such a large part of
the overall value, their management China presents some special challenges
as financial assets is important to the and practical steps to protect the value
success of the business. of IP assets are often as important as
legal ones.
Businesses that actively manage their
IP as a financial asset outperform This guide aims to explain how IP assets
their peers by up to 30%. They do so matter from a financial perspective and
by maximising the effectiveness of assess how to manage them to the
investment in the business, driving greatest business advantage.
performance in areas that produce the
best return, managing operational risk 1. Manage Return on Investment
and minimising tax risk. They may also and Improve Performance
use their IP assets as security to obtain
various forms of funding. Moreover, Where there are several IP assets,
there are opportunities to gain strategic knowing the comparative return on
advantage in relation to the sale or investment of each one allows the
purchase of a business. overall business strategy to focus on
those that will give the best return. It
A good IP management strategy also means that the risk to the viability
enhances the ability of the business to of the business if certain IP rights are
Funded by: lost can be assessed. This is important
raise funding by managing the issues
that affect valuations of IP assets. in deciding how to structure your
commercial relationships and operations
in China.

China IPR SME Helpdesk 2012 1

Managing IP as a Business Asset

As with tangible assets, measuring the return on IP to be covered by the general charge taken
investment requires knowledge of their monetary by its bank but at a nominal or nil value.
value and of the amount of investment made in them Valuing it separately often increases the
over a given period. Ascertaining individual IP assets value of the security covered by the charge.
consists of identifying the technology and brand in This can be used either to increase the
each separate product and any brand that is used for borrowing or to reduce the interest charged
more than one product. on it. If the IP assets are to be used for
another form of security it will be necessary
Example to get them released from any bank charge.
This will be easier if they are included at only
Company A develops, manufactures and sells a range a nominal value;
of state-of-the-art, prestige digital radios. Its proprietary
technology gives it a competitive advantage. Its 2) Providing security for new debt. This
house brand has a reputation for innovative products. can be to support new bank borrowing for
Its IP assets will be: cashflow or for longer-term debt to fund
investment in new products or markets.
the house brand Lending against IP assets is a specialised
form of lending usually carried out by
the technology and design of each radio in its dedicated teams within larger lending
range and its name organisations or by smaller specialist lending
houses;

3) Patent (and other IP) mortgage. A patent

mortgage is one form of lending against
patents or other IP assets. The significant
difference between this and security under a
charge is that a mortgage will usually transfer
title to the lender immediately on default.
It is a well-established form of lending by
some Chinese banks who may have more
familiarity with it than their international
2. Provide Security for Financing counterparts;

IP assets can be used to provide security for a wide 4) Creating a vehicle for raising equity. If IP
range of methods of raising funds. China has been assets are owned by a company created for
at the forefront of the use of patent mortgages and a that purpose and generate a royalty income
variety of fund-raising structures are readily available then shares can be issued in that company
from Chinese financial institutions as well as European to raise new equity finance;
ones.
5) Securitisation (bond issue). An alternative
The range of fund-raising options includes: to issuing shares in an IP holding company is
to use the companys assets as security for a
1) Providing security for existing bank bond issue in the market. This is more likely
borrowing. It is not unusual for a companys to be an attractive option for medium-sized

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Free Business Tools to Manage your IPR in China
 businesses with brands or technology that programme
is reasonably well-known in its own market-
place; Licensed to group businesses and/or third
parties to generate an income stream
6) Secure assets to benefit a third party. A
further use of an IP holding company is to Being used to increase the profitability of the
provide security to benefit a third party such business.
as the companys pension fund or a new
venture on the same group pf companies. Example

IP assets are often undervalued in company accounts. Company A decides to raise additional equity finance.
However, identifying and valuing them can result in a It creates a company (Special Purpose Vehicle or
worthwhile increase in the value that existing lenders SPV) to hold the IP assets. The SPV grants licences
will put on them as security for current lending. This to the operating company to use the IP. The SPV
can be very useful in a credit crunch. now owns a valuable asset that produces an income
stream and is protected from operational risks. It then
A portfolio of IP assets (such as the bundle of patents sells 30% of the shares in the SPV to a private equity
protecting the various inventions relating to Company house.
As radios and trademarks protecting its brand names)
is much more attractive than a single IP asset as it 3. Taxation
spreads the risk for any lender or investor.
The main areas where IP assets have special effect
The acceptability of IP assets for fund-raising will on the tax that a business has to pay are:
depend to a considerable extent on:
Many countries have special tax regimes to
What valuation is put on them encourage innovation either generally or
in specific sectors such as environmentally
Whether they are owned by an appropriate sustainable technology (EST). China
entity. encourages both EST and indigenous (i.e.,
Chinese-registered) IP so there may be
The considerations that impact on valuation include tax advantages in carrying out research
whether the IP assets are: and development in China. These must
be balanced against other tax, legal and
Clearly identified operational considerations;

Consolidated in one ownership rather than IP rights are often used by different parts of
dispersed across the group a business, whether separate companies in
a group or overseas divisions. It is common
Protected from insolvency risks associated with for this to be done an informal basis rather
operational activities than under written licences. Each part of the
business that is using the IP must pay an
Protected by appropriate registrations arms-length licence fee to the part of the
business that owns it. Failure to do so can
Subject to a structured enforcement result in the tax authorities adjusting the tax

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Free Business Tools to Manage your IPR in China
Managing IP as a Business Asset

payable for the current and earlier years. This has knowledge of all the elements essential to a
is known as transfer pricing and China has product. Where possible those IP assets that are
rules that are similar to those in force in the core to the success of the business should be split
EU; into separate operations. Each operation can then be
carried out with a different business partner and using
Most countries charge a tax on the transfer of different Chinese employees so that no one person (or
IP rights. In China, business tax is charged on company) has the full knowledge of all the technology.
transfers within the PRC and withholding tax
on transfers outside the PRC. Another approach to managing this risk is to keep the
operations relating to the most important IP in Europe
Example and to use only the less valuable or older IP assets in
China.
In the examples above, Company A is the operating
company. It pays arms length royalties to the SPV In any event, it is vital that management of Chinese
for the IP licences. The payment is made as an intra- operations is closely supervised by someone whose
group transfer so there is no additional net cost to the primary loyalty is to the main business and who is
business. This meets the requirements of the various capable of checking what is happening on the ground
transfer pricing regimes and so it incurs no additional on practice.
tax liability for its ongoing trading.
Further details of how to handle technology transfers
Note: There may be a liability to pay an exit charge are in the China IPR SME Helpdesk publication:
on transferring the IP assets to the SPV although this Technology Transfers to China: Guidance for
is unusual within a group of companies if both the Business.
operating company and the SPV are incorporated
in the EU. It is more likely that there will be a charge 5. Drawing Up an IP Strategy
if the SPV is to be created in a tax-favourable
jurisdiction. A well-managed IP strategy makes a significant
difference to the valuation of a companys IP assets.
4. Structuring Business Arrangements in China A valuer will assess the economic impact of the IP on
to Protect IP Assets the companys business. Although there are several
different valuation methodologies, all take account
Many businesses want to do business in China but of the risk to the IP. A realistic IP strategy that is
are concerned that establishing manufacturing or documented and demonstrates effective support for
other operations there may result in them losing their the overall business strategy will always enhance the
IP assets. The concerns tend to centre around their
designs, inventions or methods being copied. This
could be a serious problem not only in Asia but back in
their home markets as well if the copied products are
exported and sold there.

This risk can be managed by getting to know potential

Chinese partners and doing business only with those
who are trusted and also by structuring commercial
relationships to ensure that no one person or company

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Free Business Tools to Manage your IPR in China
ultimate valuation figure for the IP. a. Protection

The IP strategy reinforces the overall business The maxim register it or lose it applies to IP with even
strategy and will change as the business moves more force in China than elsewhere.
through different stages of its development. It will often
also differ from one market to another as the business Special points that are important in China and differ
will be at different stages of its life-cycle in each. The from Europe are:
balance of which IP rights are most useful and so
should get priority in investment and management Products should always be given a Chinese
time will vary accordingly. name otherwise the market will do so.
Trademark registration is required for the
For example, in establishing a new market, registration Chinese name, the European name and its
of trademarks and patents, designs or copyright to translation into Chinese characters so for
protect the product is likely to be more significant than each name there are three basic registrations
enforcement against infringers. Once a business is required rather than just one;
established, enforcement is likely to take a higher
priority. Where it seeks to increase market share China operates the first-to-file system for
compared with its competitors, then the focus may trademarks so earliest possible registration is
well be on defending litigation. vital;

It is essential that the management of the company is PRC, Hong Kong and Macau are separate
involved in drawing up the IP strategy and understands territories for the purposes of IP registration
how it will support the business objectives. The key and consideration should be given to the
people to be engaged are the chief executive, finance need for protection in each territory;
director, tax advisor, general counsel, chief technology
officer and chief operating officer. Any copyright that is significant to the
business should be registered with the
The IP strategy should be reviewed whenever the National Copyright Administration. This is
business strategy changes and at least once a year. voluntary but in practice it is much harder
to enforce copyright that has not been
6. Components of an IP Strategy registered;

It is essential to have protection and enforcement Software created in China must also be
strategies. It is usually too expensive to put the ideal registered prior to enforcement. Registration
amount of protection in place at once. Building the is voluntary for foreign software but again it
protection portfolio over a period of time may be more facilitates enforcement;
feasible. It should be designed to give the highest
priority to protecting the IP assets that are key to Trademark licences must be recorded with
delivering the business strategy. the PRC Trademark Office within three
months of entering into them.
Other arrangements are critical to effective IP
protection and centre around relationships and Example
behaviour with employees, business partners and
other commercial contacts. Company A does not have patent protection in China

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Free Business Tools to Manage your IPR in China
Managing IP as a Business Asset

for its earliest patents which still have several years to the Pan-Pearl River Delta.
run in Europe. As the information is already publicly
available, it has no protection in China. However, its At major trade fairs local administrative bodies co-
more recent developments are the subject of patent operate to provide a rapid enforcement service at the
applications which it pays to extend to China under the fair itself. This may be of limited use in practice since
Patent Co-operation Treaty (PCT). It has applied for it only covers the site of the fair and not the places
PRC, Hong Kong and Macau trademark registrations where infringing product is being manufactured,
to cover its products and Internet use under the main distributed or sold. It may be more worthwhile to use
brand name in its European, Chinese character and the fair as an opportunity to obtain evidence for use at
Chinese name. Next year it plans to add trademark a later stage.
registrations for the names of the individual radio sets;
and the following year it will also cover the main brand There is also an established system for recording
name for advertising and promotional materials. It has trademarks and registered copyrights with the General
domain name registrations for all three versions of the Administration of Customs. Customs then have the
names of both the main brand and individual radio power to detain suspected infringing goods at the port.
sets.
Details of special procedures available to enforce
Details of how to register patents and trade marks can patents and trademarks at some trade fairs can
be found in the IPR SME Helpdesk publication Patent be found in the IPR SME Helpdesk publication IP
& Trademark Protection in China. Strategy for European SMEs at Trade Fairs in China
and of how to use customs procedures in Guide to
b. Enforcement Using Customs to Protect Your IPR in China.

There are three main routes to enforcement: Example

administrative, civil litigation and criminal. All are
increasing in effectiveness rapidly but the picture Company A knows that its main risk in setting up
remains inconsistent across China. manufacturing operations in China is that its products
will be copied and put on the market in the EU. As
Although foreign companies often prefer to use the it does not wish to sell in Asia, it concentrates its
civil courts in Beijing and Shanghai, the plaintiff enforcement efforts on customs enforcement in China
success rate is higher in other courts and the backlog and the EU and on civil proceedings for infringement
lower. Judges in Guangzhou, Shenzhen and Nanjing in relation to any imported goods found in the EU. It
have increasing IP experience and the special High
Tech Zone court in Chengdu is gaining in reputation.

There are relatively few criminal prosecutions for IP

infringement and they usually follow a raid or seizure
by Customs.

The administrative route is the most popular and

is generally effective in clear-cut infringement
cases. There have been recent moves to improve
enforcement standards including a co-operation
agreement between the nine provinces and regions of

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Free Business Tools to Manage your IPR in China
also runs a low-cost cease and desist programme in a Chinese partner to distribute all but its newest
China. model in China. It then sets up a joint manufacturing
operation with its Chinese partner for the older sets
c. Management of relationships and behaviour and the single component. It sets up an entirely
separate manufacturing operation in another province
Chinese law recognises confidential business for the more recent sets but still manufactures one
information as protectable. While there are some key component that cannot be reverse-engineered in
statutory implied rights that arise in relation to Europe for assembly at the second Chinese factory.
employees and business partners, it is not a good idea
to rely on them. Checklist of Practical Steps/Considerations

All employment contracts should contain express 1) What is the overall business strategy?
confidentiality clauses and provide for the ownership
of IP developed by the employee. 2) Which IP assets are essential to driving the
business forward?
Similar provisions should be in all contracts with
business partners including manufacturers and 3) Are the key assets protected by registration?
agents, whether private or state. It is particularly
important to make sure that ownership of any tooling, 4) Should the R&D function be in China or in
machinery or equipment that embodies IP remains Europe?
with the business and that the partner is prohibited
from copying it or using it for any purpose other than 5) Can manufacturing/processing operations
that authorised by the business. be structured so that no Chinese partner has
access to all IP necessary to replicate your
A non-disclosure agreement should always be entered business?
into before any confidential information is provided
to another person. The key to enforcing these is that 6) If some IP cannot be protected in China,
the confidential information is properly identified in the is it worth getting practical support for its
document. protection by licensing a Chinese business to
use that part?
Where information is confidential, it should be treated
carefully and marked CONFIDENTIAL. It should be 7) Are the IP assets owned by one company in
kept in a secure place where only those who need to the group and licensed to the others?
see it and have signed an appropriate confidentiality
undertaking can have access to it. Employees and 8) I s t h e o w n e r s h i p s t r u c t u r e o f t h e I P
others who see it should be told at the outset that it is appropriate for any planned use as security
confidential and then reminded regularly. for raising finance?

Example 9) Have the tax risks been assessed and the

optimum structure for the business strategy
Company A knows that its technology is vulnerable put in place?
because its earlier patents do not cover China.Only
its older radios and one component of the more
recent models use those patents. It decides to licence

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Free Business Tools to Manage your IPR in China
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8 China IPR SME Helpdesk 2012

Guide Last Updated 2010