Can software be rented—— The ever-changing intangible asset transactions

LABEL： Tax , Intellectual property ,

Xiaoyu: Teacher Cai, recently I encountered a very strange question. A customer asked me if the software could be rented for use. I was confused by this question. Isn't the software just a royalty fee? Can it still be rented?

Teacher Cai: Xiaoyu, of course software can be rented. Do you know how many forms of transaction intangible assets can have? What are these forms of tax treatment?

Xiaoyu: Oh, I really don't know. In my mind, software is just a software license, isn't it all about the concept of royalty fees?

Teacher Cai: Listen to me slowly. You see, we all know that software is now the object of copyright protection. Let's not consider the fact that software itself often has technical content, so there may be cross legal relationships involving patents or other intangible assets in the middle, which will bring more complex tax treatment. Let's take copyright as an example. Generally speaking, you may be more familiar with copyright. Let's compare the use of software rights with general copyright.

Xiaoyu: Hmm, I am quite familiar with copyright in general. For example, the copyright of a novel. When an author creates a novel, they can own the copyright themselves or transfer it. This is called transferring ownership of intangible assets, which is taxed according to the transfer of intangible assets. He can license the adaptation rights in the copyright to the screenwriter to adapt it into a script, and the received money should be the license fee for intangible assets, taxed according to the royalty fee. He can license the copyright to the publisher, who then pays him a licensing fee, and every book sold by the publisher carries the copyright (here, it is interesting that historical books themselves are tangible movable property, while later e-books became software products, but the utility is exactly the same). This model of selling a single copyright (regardless of whether there is a physical book) is taxed based on the sale of tangible movable property. When I was a child, the books I bought could still be rented out on street stalls, just like how borrowing books from libraries is now a single use of copyright, and can also be taxed as tangible movable property leasing. It's quite interesting to hear that. If this copyright is protected globally, do different countries still have different copyrights under their legal protection? I am also very interested in how the income generated from joint investment in the film industry should be taxed. Is this also a copyright issue?

Teacher Cai: Look, look, let's not deviate for now. International affairs will be more interesting and complex, including issues of tax jurisdiction, such as whether license fees need to be subject to withholding tax, and transferring ownership may not be subject to taxation. Such issues are all very interesting. The exclusivity and non exclusivity in licenses can also bring many interesting tax issues. Let's not discuss it anymore, let's come back to software.

Xiaoyu: Alright, let's talk about software. I mentioned general copyright earlier, what do you think makes software different?

Teacher Cai: The main difference in software lies in the way it is used. Generally, copyright has a single functional use, while software is more complex. Understanding copyright can be seen through physical books. Software copyright is much more abstract because there is no "tangible" state for you to compare. But in fact, the essence is similar. The rights of software can also be viewed in this way. The copyright of the software itself is a separate intangible asset, thus constituting a fundamental property; The licensed use of software is a separate intangible asset transaction, which is what we call a royalty fee. However, the license here should refer to a license of rights, which means that the licensed use of software must include the right to copy, adapt, and other rights with code transfer content. A simple usage license is not a royalty fee. For example, if Company A develops a software and Company B only buys the software to use it, this situation is actually a single software usage right. Although it is also called a license, it is not much different from buying an e-book. It should be treated as a tax treatment based on production sales. Under Chinese tax law, this is the concept of software product sales. This kind of single use right can also be used as the object of leasing transactions, just like movable property leasing, so it can also collect rent. This is similar when you rent equipment with different software options available. From the perspective of customs, there is also a separate import of software in imported equipment. In this case, software products are an "intangible" tangible asset.

Xiaoyu: Teacher Cai, I seem to understand, but I still don't seem to understand. Do I understand. Well, that is to say, although software itself is intangible, its tax rules may be partly based on the transfer and licensing of intangible assets, and partly due to restrictions on rights, more like the transaction rules for tangible movable property.

Teacher Cai: You're really smart. It's because of this that when it comes to financial accounting and tax treatment of software, we need to be particularly careful about the rights and obligations of contracts, as legal relationships are the core foundation of this process. On this basis, you will find that software itself brings all tax rules for intangible and tangible assets. Then our country has many preferential policies for software, and software exports themselves involve various tax rules such as providing services to foreign countries, licensing intangible assets to foreign countries, transferring goods to foreign countries, and exporting goods under different legal forms. Many of the rules themselves are not yet perfect. For example, how should software product exports be managed? Is it through customs or tax bureau? Can the income from exporting software be eligible for tax incentives for software companies? How to distinguish between immediate refund and royalty fees for software product sales? These issues are controversial in the current tax laws.

Xiaoyu: Alright, now I understand how you felt when you wrote about tax treatment for game props. Game props themselves need to be determined whether they are software or not. Logically speaking, any code that can exist independently constitutes software in a technical sense. However, the limitations of using such software, coupled with the fact that software can already become a carrier for online operations, will make tax issues more complex.

Teacher Cai: Bingo, so if you bring in cloud computing, database system operations, information services, and software technology services, you will find that many seemingly ambiguous tax treatments may lead to disputes. From any simple perspective, the handling may be inaccurate and incomplete, and we cannot simply apply concepts. Our discussion today may only clarify one issue, that is, as a single right of use for software products, although it can also be called "license" (many software purchase agreements use the term "license"), it actually applies to the tax rules of tangible movable property and can also be rented out. In fact, in reality, game props (whether single player or networked) have also been traded for rent.

The intangible nature of software, combined with its rich usage and transaction methods, makes tax processing related to software appear complex and mysterious. This article only discusses the basic concepts and logic of software tax processing. We will continue to discuss more interesting topics with everyone in the future.