Announcement of the State Administration of Taxation on Enterprise Income Tax Issues concerning the Disbursement of Expenses by Enterprises to Their Overseas Related Parties

Announcement of the State Administration of Taxation [2015]No.16

March 18, 2015

In order to further standardize and strengthen theadministration of transfer pricing concerning the disbursement of expenses byenterprises to their overseas related parties, the issues concerning transferpricing with respect to the disbursement of expenses by enterprises to theiroverseas related parties are hereby announced as follows in accordance with therelated provisions in the Law of the People's Republic of China on EnterpriseIncome Tax (hereinafter referred to as the "Law on Enterprise IncomeTax") and its Implementing Regulations:

Article 1 In accordance with Article 41 of the Law on EnterpriseIncome Tax, the disbursement of expenses by enterprises to their overseasrelated parties shall be subject to the independent transaction principle; asfor the expenses disbursed to the overseas related parties that are not underthe independent transaction principle, the tax authorities may make anadjustment.

Article 2 In accordance with Article 43 of the Law on EnterpriseIncome Tax, in case that the enterprises disburse expenses to their overseasrelated parties, the competent tax authorities may require the enterprises toprovide the contracts or agreements signed between them and their relatedparties and the related data records demonstrating that those transactionsreally happen and are subject to the independent transaction principle.

Article 3 If the enterprises disburse expenses to their overseasrelated parties that fail to perform their functions or bear risks and thathave no substantial operating activities, such expenses shall not be deductedwhen the taxable income of enterprises is calculated.

Article 4 If the enterprises pay for the services rendered bythe overseas related parties, these services shall enable the enterprises toobtain the direct or indirect economic benefits. If the enterprises disburseexpenses to their overseas related parties for the following services renderedby the latter, such expenses shall not be deducted when the taxable income ofenterprises is calculated:

1. the services that have no relation with the functional risksassumed by, or the operations of, the enterprises;

2. the services such as the control, administration and supervisionon the enterprises carried out by the related parties for the protection of theinvestment interests of the enterprises' direct or indirect investors;

3. the services that are rendered by the related parties andhave been paid for by the enterprises to the third parties or have beenconducted by the enterprises themselves;

4. the concrete services that are conducted for the enterprisesby the related parties within the groups and are not accepted by theenterprises, even though the enterprises obtain extra benefits because they areaffiliated to these groups;

5. the services whose costs have been disbursed in other relatedtransactions; and

6. other services that cannot, directly or indirectly, bringeconomic benefits to the enterprises.

Article 5 Where the enterprises using the intangible assetsprovided by their overseas related parties need to pay royalties, they shallconsider the share of contribution of each related party in the value creationof these intangible assets and determine the share of economic interests thatit shall enjoy. Where the disbursement of royalties by the enterprises to theirrelated parties that only have the legal ownership of intangible assets andmake no contributions to the abovementioned value creation is not subject to theindependent transaction principle, such royalties shall not be deducted whenthe taxable income of enterprises is calculated.

Article 6 If an enterprise establishes a holding company orfinancing company overseas for the major purpose of financing and listing, anddisburses royalties to their overseas related parties for the spinoff benefitsarising from the relevant financing and listing activities, such royaltiesshall not be deducted when the taxable income of enterprises is calculated.

Article 7 In accordance with the provisions in Article 123 ofthe Implementing Regulations of the Law on Enterprise Income Tax, if thedisbursement of expenses by enterprises to their overseas related parties failsto be in accord with the independent transaction principle, the tax authoritiesmay make a special tax adjustment within ten years as of the tax year in whichthe above disbursement occurs.

Article 8 The Announcement of the State Administration ofTaxation on Enterprise Income Tax Issues concerning the Disbursement ofExpenses by Enterprises to Their Overseas Related Parties shall take effect asof the date of promulgation.

It is hereby announced.