On March 18, 2015, the State Administration of Taxation issued the State Administration of Taxation Announcement on Enterprise Income Tax Issues Relating to Payment of Expenses to Overseas Affiliates (hereinafter, the "Announcement") on issues relating to an enterprise's payment of the transfer pricing of expenses to its overseas affiliates.
The Announcement specifically stipulates that an enterprise's expense payment to its overseas affiliates should satisfy the arm's-length principle. When an enterprise pays a licensing fee to an affiliate that merely owns the intangible assets without making contribution to their value, the payment shall not be deducted from the payable enterprise income tax because this transaction does not meet the arms-length principle. When an enterprise sets up an overseas holding company or financing company, royalties paid to overseas affiliates for the benefits generated from listing also cannot be deducted from the taxable income of the enterprise.
The Announcement also specifically stipulates that an enterprise's expense payment to an overseas affiliate for acceptance of services provided by such affiliate should meet the principle that such services can provide direct or indirect economic benefits to the enterprise. Meanwhile, the Announcement also stipulates the following six circumstances where expense payment to overseas affiliates should not be deducted from the calculation of the payable enterprise income tax: If the services have nothing to do with the enterprise's assumption of functional risks or its operations; if an affiliate provides service such as control, management and supervision over the enterprise to protect the interests of the enterprise's direct or indirect investors; if the services provided by an affiliate have been procured by the enterprise from a third party or have been implemented by the enterprise on its own; if the enterprise does not accept the specific services provided by an affiliate of a group even though the enterprise has received additional benefits due to its affiliation with the group; if compensation for services has been received in another transaction with an affiliate; and if there are other services which do not bring any direct or indirect economic benefit to the enterprise.
The Announcement came into effect on the day of its promulgation.