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China – Transfer Pricing (2025)

The arm’s length principle is incorporated into Chinese domestic legislation through the Enterprise Income Tax Law, Chapter 6, Article 41. Administrative rules further develop practical application of the principle, notably the Public Notice of the State Administration of Taxation [2017] No.6 (Public Notice [2017] No.6) and the Public Notice of the State Administration of Taxation [2016] 42 (Public Notice [2016] 42). These instruments regulate special tax investigations and adjustments as well as requirements for contemporaneous documentation and the administration of related party transactions.

The rules apply to companies subject to enterprise income tax in China and address issues relating to permanent establishments (PEs) insofar as transfer pricing rules are used to analyze related party dealings; however, the profile does not provide a detailed domestic guidance on profit attribution to PEs under the AOA.

Arm’s Length Principle and the role of the OECD Guidelines

China respects the OECD Transfer Pricing Guidelines and incorporates their basic aspects into domestic law. Public Notice [2017] No.6 explicitly requires tax authorities, when conducting transfer pricing investigations, to perform comparability analysis under the framework of the OECD Guidelines (Article 15 Public Notice [2017] No.6). Thus, the OECD Guidelines serve as primary reference for interpreting and applying the arm’s length principle in China.

Public Notice [2016] 42 provides the domestic definition of related parties. A related party relationship exists where any of the conditions in items (i) through (vii) are met. Specifically, one party directly or indirectly owning 25% or more of the shares of the other party, or a common third party directly or indirectly owning 25% or more of both parties, constitutes a related relationship (item (i)). Relationships also arise where, despite shareholdings being below 25%, total debt between the parties accounts for 50% or more of either party’s total paid-in capital, or where 10% or more of one party’s total debt is guaranteed by the other (item (ii)), excluding loans or guarantees from or between independent financial institutions. Relatedness is also deemed where business operations depend on proprietary rights such as patents, non-patented technological know-how, trademarks or copyrights provided by the other party (item (iii)), or where business activities like purchases, sales or receipt/provision of services are controlled by the other party (item (iv)). Where more than half of the directors or senior management (including specified positions in company articles) of one party are appointed by the other party, or serve simultaneously for both parties, or a common third party appoints a majority of directors or senior management of both parties, a related relationship exists (item (v)). Natural persons who are spouses, lineal relatives, siblings, or in other custodial/family maintenance relationships, may create relatedness if each party has one of the relationships specified in items (i) to (v) with the different parties (item (vi)). Finally, item (vii) captures situations where two parties substantially have common interests in other ways.

Methods and selection criteria

Chinese regulations explicitly list traditional and transactional methods: Comparable Uncontrolled Price (CUP), Resale Price, Cost Plus, Transactional Net Margin Method (TNMM) and Transactional Profit Split, and allow for other methods where consistent with the principle that profits should be taxed where economic activities occur and value is created (Public Notice [2017] No.6, Articles 16-22). Asset appraisal methods including cost approach, market approach and income approach are referenced where appropriate. The domestic rules do not impose a rigid hierarchy; instead, tax authorities should select the most appropriate method based on comparability analysis (Article 16-22 Public Notice [2017] No.6). The profile indicates no specific domestic guidance on commodity transactions.

Comparability and ranges

China follows the comparability guidance of Chapter III of the OECD Guidelines (Article 15 Public Notice [2017] No.6). There is no statutory preference for domestic comparables over foreign ones; authorities may use both. Importantly, tax authorities are permitted to use both public and secret comparables for transfer pricing assessments (Public Notice [2017] No.6). Regarding statistical measures, the rules allow calculation of various statistics such as arithmetic mean, weighted mean or inter-quartile range to determine an arm’s length point or range; calculations may be performed on a year-by-year basis or as a multi-year average (Article 25 Public Notice [2017] No.6). Where significant differences exist between related party and unrelated transactions, reasonable adjustments should be made to account for such differences (Articles 17-20 Public Notice [2017] No.6).

Intangibles

Domestic guidance specific to controlled transactions involving intangibles is provided in Articles 30–32 of Public Notice [2017] No.6. The regulatory approach emphasizes value contribution as the main factor for income allocation from intangibles and requires full consideration of DEMPE functions when allocating returns. If a taxpayer pays royalties to a related party that only owns intangible assets but does not contribute to their value and the arm’s length principle is not followed, tax authorities may make a special tax adjustment. Royalties must correspond to the economic benefit the intangible confers; absence of such benefit and non-compliance with the arm’s length principle also permits adjustment. The profile explicitly indicates there are no specific rules on hard-to-value intangibles (HTVI) in domestic law: No domestic HTVI guidance is provided in the profile. Outside transfer pricing rules, asset appraisal methods (cost, market and income approaches) may be applied when appropriate (Article 22 Public Notice [2017] No.6).

Intra-group services

Public Notice [2017] No.6 addresses intra-group services in Articles 34–36. Fees paid by subsidiaries for intra-group services should not automatically be treated as low value-adding services eligible for safe harbour treatment; instead, six tests (benefit, necessity, duplication, value creation, remuneration and authenticity tests) must be applied to determine whether the charges are arm’s length. Tax authorities may apply special tax adjustments in situations where payments are made for non-beneficial services; where payments are made to an overseas related party that does not perform functions, bear risks, or have substantive operations; or where an overseas holding or financing company set up mainly for financing and listing receives royalties linked to spinoff-related benefits. There is no simplified approach for low value-adding intra-group services in domestic rules.

Financial transactions

The profile does not identify specific transfer pricing guidance for financial transactions in domestic TP rules: No domestic guidance specific to financial transactions is provided in the profile. Nevertheless, there are relevant rules outside the TP framework, namely thin capitalization provisions. The thin capitalization guidance in the Implementation Measures of Special Tax Adjustments (Trial Version), commonly referred to as “Circular 2”, and Circular Cai Shui [2008] No.121, sets debt-to-equity standards. If related-party debt exceeds the standard ratio, interest expense may be non-deductible unless arm’s length pricing can be demonstrated. Circular Cai Shui [2008] No.121 specifies a general standard ratio of 2:1 for most industries and 5:1 for companies in the financial services sector. The thin capitalization rule is generally treated as part of the special tax adjustment regime rather than a separate non-TP rule.

Cost Contribution Arrangements

Cost incurred in the joint development of intangibles by related parties must be determined according to the arm’s length principle, as provided in the Enterprise Income Tax Law, Chapter 6, Article 41.

Transfer pricing documentation and reporting

China requires taxpayers to prepare transfer pricing documentation consistent with the OECD’s three-tier approach: a master file in line with Annex I to Chapter V of the OECD Guidelines, a local file aligned with Annex II, and a country-by-country report consistent with Annex III. The jurisdiction also requires specific transfer pricing returns which may be filed separately or attached to the tax return (Public Notice [2016] 42). Timing requirements specify that the master file be completed within 12 months after the fiscal year end of the ultimate parent company. The local file and special issue file must be completed by 30 June of the year following the year during which the related party transactions occurred. Contemporaneous documentation must be submitted within 30 days of a request from tax authorities and must be prepared in Chinese, specifying the sources of information used (Article 19-24 Public Notice [2016] 42).

Sanctions and compliance incentives regarding documentation are also provided. For enterprises that file related party transactions, submit contemporaneous documentation and other relevant information as required, when additional tax is levied in a special tax investigation, interest can be charged based on the People’s Bank of China central base lending rates for the corresponding period, in accordance with Article 122 of the Implementation Regulations of the Enterprise Income Tax Law (Article 25 Public Notice [2016] 42). Enterprises with effective advance pricing agreements may elect not to prepare the local file and special issue file with respect to related party transactions covered by such APAs (Article 18 Public Notice [2016] 42).

Safe harbours, exemptions and materiality

China does not have general safe harbours in place with respect to certain industries, types of taxpayers or types of transactions according to the profile. No other simplification measures are noted in the questionnaire responses.

Advance Pricing Agreements (APAs) and Mutual Agreement Procedure (MAP)

China offers Advance Pricing Agreements and the Mutual Agreement Procedure as mechanisms to prevent and resolve transfer pricing disputes. APAs may be unilateral, bilateral or multilateral. The administration has issued Public Notice [2016] 64 regarding enhancement of APA administration and references to APAs appear in Public Notice [2017] No.6 (Article 47 Public Notice [2017] No.6). The profile confirms availability of APAs and MAPs but does not include detailed procedural timelines or step-by-step filing requirements beyond the cited notices.

Penalties and other considerations

Taxpayers are allowed to make year-end self-adjustments to amend taxable profits on related-party transactions (Article 3 Public Notice [2017] No.6). The profile indicates China is researching secondary adjustments but does not describe a finalized regime in this respect (China is now researching on this issue). Internal administrative rules govern panel review of major cases under special tax adjustments (Rules and Procedures for Panel Review of Major Cases under Special Tax Adjustments Guoshuifa [2012]16) and internal working procedures exist (Internal Working Rules and Procedures for Special Tax Adjustments Shuizhongfa [2016] No.137), though these are described as internal and no public detailed references are provided. The jurisdiction does not follow the Authorised OECD Approaches (AOA) for PE profit attribution according to the profile.

Conclusion

China’s transfer pricing framework is anchored in the Enterprise Income Tax Law and developed through administrative Public Notices that largely align domestic practice with the OECD Transfer Pricing Guidelines. The regulatory framework provides detailed definitions of related parties (including a 25% shareholding threshold, 50% debt criteria and a 10% guarantee threshold), enumerates permissible methods (CUP, Resale, Cost Plus, TNMM, Profit Split and other appropriate approaches), mandates contemporaneous documentation and a three-tier documentation regime with specific timing and language requirements, and allows the use of secret comparables and statistical measures such as the inter-quartile range. The country also maintains thin capitalization standards (2:1 general, 5:1 for financial sector) and implements APAs and MAPs. Areas under development or not addressed in detail in the profile include HTVI rules, general safe harbours and a fully articulated secondary adjustment regime; in such areas practitioners should consult the OECD Guidelines for additional guidance.

References

For further information and consolidated country profiles, see the OECD transfer pricing country profiles page: https://www.oecd.org/en/topics/sub-issues/transfer-pricing/transfer-pricing-country-profiles.html

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