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Licensing
Table of Contents

As an alternative to their own production in China, European companies can consider allowing a Chinese company to manufacture in whole or in part on the basis of a license - licensing. The main problems when designing a license model are:

Table of Contents

Determination of the contractual partner

It is sometimes during the licensing process It is not clear who is the driving force behind which company and what future fate the partner company will have in the future.

Through sales, mergers and other forms of universal succession, the know-how can end up in hands other than those imagined when the contract was concluded. When granting the license, the license agreement must therefore be based on a thorough due diligence check at this point.

When issuing licenses, keep in mind: protection of intellectual property

Within the Licensing is an appropriate contractual arrangement to protect business interests, especially the protection of intellectual property, is particularly advisable in relation to China. The problem of known intellectual property infringements always exists, regardless of any contractual arrangement.

It is therefore recommended to maintain access to their market potential through constructive cooperation with the contractual partner. At the same time, within the framework of a collaboration, you could influence product development through your own contributions and also promote the expansion of the product application to other users. This should make it possible to create a real and lasting win-win situation.

Applicable law, language, jurisdiction

Enforcing contractual claims in China is very difficult for a foreign company.

This is due not least to the fact that the jurisdiction is still not entirely independent, especially when the defendant is a state-owned company. There is no bilateral enforcement agreement. The application of the law of the European partner and the sole validity of the German or English version of the contract should therefore be urged, and jurisdiction outside of China should be agreed upon. Arbitration is often agreed upon, but does not always deliver what it promises.

Assessment of the benefit on both sides

A European company will not issue a license if the long-term economic benefit from it is not reasonably certain.

You will have to agree on quantity and price frameworks and also agree on exit scenarios. In order to find a framework for the license fee to be agreed upon when granting a license, some management consultancies resort to database research, which, despite the immense costs, rarely delivers really useful results.

This is particularly true for medium-sized businesses. A useful solution is provided by our own calculation models, in which the advantages of production in China are approximately taken into account. Price, quantity and cost developments can and must be reflected in it. The potential benefit can be achieved by capitalizing future cash values ​​of the investment using recognized methods, e.g. E.g. IDW S1, and thus also establish a license agreement.

Determination of the license fee

It always makes sense to agree on a one-off fee, which can relate to the costs of starting up, a certain period of time or over certain quantities. Whether time-limited or geographically limited licenses are granted will also have to be taken into account.

The basis for calculating the license can be units produced, possibly with a minimum quantity that is subject to remuneration, whether it was produced or not. It is often not possible to determine with sufficient certainty how many parts can be sold per year, although both the licensor and the licensee will base their expectations and thus their price expectations on certain quantities.

It will be easy to determine the number of units produced, especially if the European company supplies the core components. In other cases one will have to try to determine the return from licensed production.

The same applies to the sales model, because e.g. B. a certain potential for discussions is created through intermediate sales or politically motivated actions. But synergy effects, evaluated according to a predetermined methodology, are also suitable as a fair basis for a remuneration regulation. Depending on the situation, you will find individual parameters that are suitable for determining value alone or in mixed forms.

Controlling

Depending on the model, the quantity produced can be determined by the number of core components delivered or by the income or sales from the licensed product. Regardless of this, it should be agreed in the licensing agreement that a Western auditing firm will be commissioned to carry out an annual special audit and report to both parties.

Controlling in the sense of managing the commitment should, if possible, take place via a common platform for the further development of products, expansion of the areas of application and, last but not least, the gradual deepening of mutual relationships, e.g. B. in the sense of a procurement.

Jürgen Bächle
Jurgen Bachle

has been working as an independent tax consultant and expert in international tax law since 1989 and has been a member of the board of the German Association of Tax Consultants Baden-Württemberg, DSTVBW, for over 20 years.

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