China’s Corporate Income Tax Update: What You Need to Know

By Richard Hoffmann, ECOVIS Beijing China

Watch out! China’s new regulations on corporate income taxation regulate inter-company expenses. Learn how to manage payments from related companies to avoid paying too much taxes.

1. Public Notice on Issues of Corporate Income Tax on Paying Expenses to Overseas Related Parties (SAT Notice No. 16, 2015) (“the No. 16 Notice”)

On 18 March 2015, the State Administration of Taxation (“SAT”) issued the above notice, regulating cross-border inter-company expenses and fees. The main points of the notice are the following:

• The pricing of the inter-company expenses should be set on a arm’s-length-basis. The tax authority may adjust the price if it is not.
• The tax authority may request the parties to provide relevant contracts/agreements, or other documents for recordal.
• If a Chinese company pays labor service fees to the foreign related party, the company should benefit directly or indirectly from these labor services, otherwise the fees paid cannot be deducted before tax.
• When paying royalties to the foreign related party, facts such as all the parties’ contributions to the intangible assets should be considered. If the company is paying royalties to a party who owns it but does not contribute to the value of the intangible asset, the fees cannot be deducted before tax.

This notice is retroactively effective for the past 10 years.

Ecovis Observations:

Foreign companies with subsidiaries in China often have inter-company service fee arrangements. The pricing of such service fees is usually decided internally. With No. 16 Notice now in effect, companies should be careful when arranging such service agreements.  It is recommended that the companies consult a tax expert when drafting these agreements or deciding the amount of fees.

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	Richard Hoffmann is a Partner at ECOVIS Beijing China. Richard obtained an honor’s degree in law and worked in Germany, America and China for various prestigious law firms prior to joining ECOVIS. He has published more than fifty articles in international magazines, frequently speaks at high profile events in China and abroad and is often invited as a legal expert by international TV. Contact: richard.hoffmann@ecovis.com
Ecovis Beijing is the trusted tax and legal advisor of several embassies and official institutions in China. It specializes in mid-sized international companies and focused on tax & legal advisory, accounting and auditing. If you’re interested in finding out more about tax and legal, don’t hesitate to sign up to our Newsletter or give us a call +86 10-65616609 (ext 811/806) or contact us directly via Beijing@ecovis.com