Managing director as representative

Subsidiaries of overseas companies need to be prepared as soon as possible to submit transfer pricing documentation to the Chinese tax authorities relating to prices charged between a parent company and a subsidiary, unless they qualify for exemptions.

The Chinese tax authorities will be asking some overseas-owned businesses for documentation to support their inter-company sales and purchasing activities.

Transfer pricing is commonly used to manage profit and loss ratios across a group of companies by allocating taxable profits to a jurisdiction with a lower tax rate to improve the group’s tax-efficiency.

However, with global business operations becoming more and more complicated, governmental controls on transfer pricing have become increasingly stringent, and it is important that companies understand the risks and comply with the latest regulations.

In February the Organisation for Economic Co-operation and Development (OECD) published its final paper on transfer pricing.

The paper highlighted tax enforcement policies relating to both non-financial institutions and financial institutions such as banks and insurance companies. It also calls for an analysis of loans connected to the related parties, the impact of transfer pricing on the group’s financial centres, cash pooling and loan guarantees – from the perspective of both parties involved.

Maintaining compliance in China

Overseas subsidiaries may be asked to supply relevant documentation by 30 June this year, or possibly before, unless their annual related purchases and sales are less than CNY200m and below CNY40m for other related transactions.

However, those figures don’t include any amounts for related party transactions resulting from a cost-sharing agreement or advance pricing arrangement (APA) within the fiscal year. Related party transactions belong to the scope involved in the implementation of Advance Pricing Arrangements (APAs).

Exemption is also granted if the proportion of shares owned by the overseas parent company is less than 50% and the enterprise in China only conducts related-party transactions domestically.

When a company’s business processes involve imported materials, the annual transaction amount is calculated based on annual import and export customs price it declares.


As a practical example, take the case of a well-known processing and trading enterprise that has been established in China for more than ten years.

In 2019 it carried out CNY0.3bn worth of purchase and sale transactions with its related companies and, in addition, the overseas parent company provided technology support services to the Chinese-based company worth CNY40m.

In this instance, the company does not meet any of the exemption requirements, so providing local transfer pricing documentation is a must for year 2019.

Documentation requests

Where a company’s annual related party transaction amount exceeds the legislative threshold, the relevant tax authority may ask for transfer pricing documentation local file and special issue files. If so, these should be submitted by 30 June the following year.

The tax authorities may also question the company if it reports low profits. In this case, completing new transfer pricing documentation is recommended to help identify if the company’s profits are fair and market-orientated.

Master files

Providing the parent company outside China has prepared the transfer pricing master file, the company in China does not need to prepare a local file, unless the transfer pricing documentation exemptions cannot be met or if the relevant tax bureau specifically requests it.

Related party transactions

When a company based in China carries out large volumes of related party transactions with overseas entities during the year there may be some associated transfer pricing risks.

To mitigate these risks and validate the compliance of any related party transactions, the company should engage an experienced tax advisory firm to carry out a benchmarking study.

Pricing methods

Sometimes the tax authorities will challenge a business on the transfer pricing method it uses in China.

When this happens, it’s best to appoint an experienced adviser familiar with handling the relevant arguments to analyse the current method and advise on how to resolve the transfer pricing issues involved.

For more information, contact:

Mrs Eva Tian
Chung Rui Tax Group
T: +86 21 2030 0081

Date: April 2020