Partner News

Author Archives: China Briefing

China Eases Currency Controls, Allowing Free Exchange of Foreign Currency Capital

Posted on by

Foreign Direct Investment

By Rainy Yao

Recent months have seen a number of regulations by the Chinese government aimed to ease some of the restrictions that are part of China’s currency control system. The latest of these changes is the announcement by the State Administration of Foreign Exchange (SAFE) on March 30, 2015, stating that foreign-invested companies may now convert RMB to and from foreign currency in the capital account. Continue reading…

The New Free Trade Zones Explained, Part I: Guangdong

Posted on by

705px-China_Guangdong.svgBy Rainy Yao

On April 20, the policy frameworks for the Tianjin, Guangdong and Fujian Free Trade Zones (FTZs) were officially published by the State Council, along with an updated Negative List, which details prohibited or restricted industries for foreign investment in all of the four existing FTZs in China, including the expanded Shanghai FTZ. The three FTZs were approved in December last year by Chinese Premier Li Keqiang.

Following this, China announced the expansion of the Shanghai FTZ earlier this year to include Lujiazui, the city’s financial district. In Part 1 of this series, we provide details of the Guangdong FTZ and explore the new investment opportunities brought by the new Free Trade Zone.

Continue reading…

VIE Problems? Shanghai’s Free Trade Zone is the Answer

Posted on by

CDE Op-Ed Commentary

Recent media coverage over the Chinese Government’s clampdown on Variable Interest Entities (VIE) has indicated foreign companies, and especially those from Silicon Valley in the e-commerce area, will suffer due to this positioning. China being horrible to foreign investors is becoming a recurring theme, yet long-term China observers will recognize that it simply does not work like that in the PRC. The country continues to relax regulations concerning FDI and has long indicated its discomfort with VIE investments. These investments have proven popular as a legal ‘solution’ in the past to enable foreign companies to gain effective control of a Chinese limited company. This is done in order to get around restrictions on foreign ownership laws, especially in the e-commerce field. Continue reading…

The Automation of China’s Labor Force

Posted on by

Roboscribe_KUKA_RoboticsBy Kelsey Ryan

The robotics industry is on the cusp of revolutionizing the way business is conducted in China; and the world. With China expected to have the most industrial robots operating in production plants worldwide by 2017, foreign investors should take note. China currently holds the title of the world’s largest market in the sale of industrial robotics, but lacks robotic density. Continue reading…

In Curbing Transfer Pricing, China Moves Beyond OECD Guidelines

Posted on by

Contemporaneous-Transfer-Pricing-DocumentationBy Sowmya Varadharajan, IC Advisors Pte Ltd

On March 18 2015, the State Administration of Taxation (SAT) made an announcement on Issues relating to Corporate Income tax on Expenses Paid by an Enterprise to its Overseas Affiliated Party. The announcement reiterates the need for payments made to related parties to be consistent with the arm’s length standard. It has always been necessary to provide relevant documents to show compliance with the arm’s length standard. However, the latest announcement introduces additional requirements that need to be met before the SAT will allow tax deductions for payments to overseas affiliates.

Specifically, the SAT noted payments to overseas related parties that do not perform any key functions or do not bear risk will not be deductible.

Related Link IconRELATED: China Moves to Curb Transfer Pricing – Effective Immediately

This policy essentially requires the overseas affiliate to perform substantial business activities. Tax planning structures, where an entity is incorporated in a tax advantaged jurisdiction (e.g. the Cayman Islands, British Virgin Islands) to charge fees to Chinese subsidiaries, may therefore no longer be permissible. In order for the expense to be deductible in China, the Chinese entity making the payment has to demonstrate the substantial business activities of the overseas affiliate receiving payment. 

As per the announcement, the following services are explicitly excluded: 

  1. Services such as control, management or supervision that are rendered for the purpose of protecting the interests of the company’s shareholders. As the China-based entity is not the beneficiary of these services, these transactions do not comply with the arm’s length principle and are therefore not deductible
  2. Duplicate services: e.g. where the Chinese taxpayer has purchased or carried out services by itself, yet also pays an overseas affiliate for them.
  3. Services that are passive or ancillary in nature – i.e., there is no specific service that is carried out by the overseas related party specifically for the Chinese enterprise
  4. Services that do not bring about direct or indirect economic benefit to the enterprise
  5. Services that are irrelevant to the risks or business that the Chinese taxpayers carries out
  6. Services that have already been compensated for in other transactions

With respect to payment for services, this announcement is broadly consistent with the current services regulations that have been established in most jurisdictions. For example, Chapter 7 of the OECD Transfer Pricing Guidelines details how service transactions should be analyzed in relation to transfer pricing, and covers most of the above considerations. 

However, the SAT has gone one step further in relation to services transactions by specifically including the points 5. and 6. The requirement to demonstrate that services are relevant to the business that the Chinese entity carries out may actually limit the practice of charging a management fee that most multinational corporations have adopted in respect of subsidiaries.

This issue has also been raised in the comments the SAT provided  to the United Nations for the development of the chapter on services in its transfer pricing guidelines.  Specifically, the SAT notes in an example that various advisory and legal services are provided by a parent company to a manufacturing subsidiary in China. Although these services do benefit the Chinese subsidiary, they may not be needed given the functions performed by the manufacturer. Thus, it is clear that the SAT requires a more detailed analysis of the services the overseas affiliate has performed before it will allow a deduction.

Related Link IconRELATED: U.S. Officials in Hong Kong Gathering FATCA Non-Compliance Data

While this announcement concerns itself primarily with the payment for services, it also mentions situations where the SAT may not allow deduction for royalty expenses. In the case of royalties, the SAT brings out an important distinction between the legal ownership and economic ownership of intellectual property rights. If an entity only has legal ownership and does not invest in the economic ownership of the IP, royalty payments may not be deducted. The Chinese enterprise is expected to determine to what extent the overseas affiliated parties contributed to the creation of the intellectual property, and pay the entities involved on that basis. Again, this is likely to increase the transfer pricing documentation compliance burden faced by Chinese enterprises that would like to establish tax-efficient structures where royalty payments are deductible in China, with the royalty income taxed at a tax-advantaged jurisdiction. 

In general, scrutiny on service fees and royalties have been on the rise in China.  In July 2014, the SAT released an internal notification (Circular 146) to urge tax authorities at all levels to carry out extensive tax investigations on substantial amounts of service fees and royalties made to overseas related parties. Against this backdrop, the recent announcement has provided some clarity on how multinational corporations should structure their services and royalty payments out of China. 

Sowmya Varadharajan is a founding director of IC Advisors Pte Ltd, a transfer pricing consulting firm. Sowmya has more than 12 years of experience assisting clients in designing, supporting and defending various related party transaction structures.  Having been trained in the U.S., Sowmya currently focuses her attention on helping clients in the Asia Pacific region address their transfer pricing issues.


Asia Briefing Ltd. is a subsidiary of Dezan Shira & Associates. Dezan Shira is a specialist foreign direct investment practice, providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in China, Hong Kong, India, Vietnam, Singapore and the rest of ASEAN. For further information, please email or visit

Stay up to date with the latest business and investment trends in Asia by subscribing to our complimentary update service featuring news, commentary and regulatory insight.


Related Reading

Tax, Accounting, and Audit in China 2015
This edition of Tax, Accounting, and Audit in China, updated for 2015, offers a comprehensive overview of the major taxes foreign investors are likely to encounter when establishing or operating a business in China, as well as other tax-relevant obligations. This concise, detailed, yet pragmatic guide is ideal for CFOs, compliance officers and heads of accounting who must navigate the complex tax and accounting landscape in China in order to effectively manage and strategically plan their China operations.

CB 2015 1 issue cover 90x126

Using China’s Free Trade & Double Tax Agreements
In this issue of China Briefing, we examine the role of Free Trade Agreements and the various regional blocs that China is either a member of or considering becoming so, as well as how these can be of significance to your China business. We also examine the role of Double Tax Treaties, provide a list of active agreements, and explain how to obtain the tax minimization benefits on offer.


CB 2015 2 issue cover 90x126

Managing Your Accounting and Bookkeeping in China
In this issue of China Briefing, we discuss the difference between the International Financial Reporting Standards, and the accounting standards mandated by China’s Ministry of Finance. We also pay special attention to the role of foreign currency in accounting, both in remitting funds, and conversion. In an interview with Jenny Liao, Dezan Shira & Associates’ Senior Manager of Corporate Accounting Services in Shanghai, we outline some of the pros and cons of outsourcing one’s accounting function.

China Regulatory Brief: Simplified Company Registration Procedures, General Plans of New FTZs Released

Posted on by
China to Simplify Company Registration Procedures

On April 17, the State Administration for Industry and Commerce (AIC) announced its decision to simplify companies’ registration and establishment procedures. Specifically, the National organization code certificate and tax registration certificate will no longer be issued separately. Instead, the local AIC will issue a special business license to enterprises with both organization code and tax registration code on it. Further, the AIC is looking to implement a unified “business registration code” to replace the current three codes for company registration within this year. According to the latest statistics released by the AIC, 844,000 companies have been newly established in China during the first quarter of this year.

China Releases General Plans of New Free Trade Zones

On April 20, China’s State Council finally released the much-anticipated overall plans of the Tianjin, Guangdong and Fujian Free Trade Zones (FTZs) approved earlier this year, as well as an updated Negative List which is applicable to all of the four FTZs in China, including the expanded Shanghai FTZ. In December last year, Chinese Premier Li Keqiang announced that three more FTZs will be established in China, based on the model of the Shanghai FTZ. Each is to make full use of its geographic location and carry special local features.

Continue reading…

Social Security in China: What a Foreign Company Needs to Know

Posted on by

By Amelia Tsui
Associate, Dezan Shira & Associates 

According to the China Labour Bulletin, the current social welfare structure emerged after the abolishment of the “iron rice bowl” concept and the introduction of the “one child policy”. Doing away with the “iron rice bowl” left many Chinese without guaranteed employment, housing, healthcare and pension. Implementing the “one child policy” meant many parents were no longer able to rely on their multiple children to take care of them in their old age.

China’s current welfare system can be said to be a result of these two events. It is now up to companies (including foreign companies), instead of the government, to contribute to each employee’s social welfare.

Continue reading…

Buying and Printing Fapiao

Posted on by

201504-illustrationBy Steven Elsinga and Jim Qiao

This article is additional, unpublished content from our latest issue of China Briefing Magazine, titled “Managing Your Accounting and Bookkeeping in China.” Read more in the first article of this series.

Buying Fapiao Paper

Companies need to buy their fapiao paper from the tax authorities. To purchase fapiao, a staff member needs to physically go to the tax office and bring the following items:

  • The previous fapiao booklet with unused fapiao (if any)
  • The ID card of the employee tasked with making the purchase
  • Special fapiao seal
  • Tax Registration Certificate

Continue reading…

Asia Briefing Bookstore Catalogue 2013
Scroll to top