Transfer pricing documentation requirements in China

1. In your jurisdiction, are taxpayers obliged to maintain transfer pricing documentation? Does this obligation apply to all taxpayers, or only to certain categories (e.g. taxpayers with turnover or assets exceeding a particular threshold)?

In China, all taxpayers are required to prepare transfer pricing documentation unless they fall under the following categories:

  • Companies with an annual related party transaction value (purchase and sale) below RMB 200 million (approximately EUR 20 million) and with other annual related party transactions (services etc.) below RMB 40 million (approximately EUR 4 million);
  • Companies covered by an advance pricing arrangement (arrangement with the Chinese tax authorities regarding transfer pricing);
  • Companies with related party transactions limited to China (excluding Hong Kong, Macau and Taiwan) and in which foreign investors hold less than 50% equity.

As an exception to the general rules above, if a company with foreign investors (i) only has limited functions and takes limited risks in China (such as sole manufacture, a distribution company or a research company), (ii) does not bear the financial or market risks on decision making, and (iii) has incurred losses in a given year, it must prepare documentation for that year.

In addition, a company that has been subject to transfer pricing reassessment in a given year will be subject to a reassessment supervision period of five years and will be obliged to provide documentation in each year of the supervision period.

2. What is the content of the documentation that must be prepared?

The documentation shall contain the following:

  • Organisation structure, such as global organisation and shareholding structure of the group, description of any change of shareholding or organisation structure, related tax and preferential tax treatment of each associated party;
  • Overall business operation, such as business overview of the company, industry analysis, company development, composition of principal activities, market position and competitors, internal organisation structure, functions and risks consolidated financial statement of the groups;
  • Description of related party transactions, such as type of each transaction, trading mode, supply chain information covering both physical product flow, cash flows and transfer of title, intangible assets, copies of related contracts, sales, costs and expenses and profits analysis;
  • Comparability analysis, such as functions and risks, source of comparables, selection method and reasons, and benchmarking results;
  • Description and justification of transfer pricing methodology, such as reasoning, assumptions or other information supporting the selected transfer pricing methodology.

a) Which transactions must be documented (all transactions with associated enterprises, or only those which exceed a particular threshold)?

Companies obliged to make transfer pricing declarations must document all their related party transactions. For the time being, no threshold has been provided by related tax regulations.

b) What is the definition of “associated enterprises” for the purposes of this requirement?

Chinese law does not define “associated enterprises”, but defines “associated relationship” which is used to determine “associated enterprises”. An “associated relationship” includes:

  • Direct or indirect ownership of more than 25% of equity interests / shares of the other party, or direct or indirect ownership by a third party of more than 25% of equity interests / shares of both parties. Where there is an intermediate party or parties, ownership of more than 25% equity interests / shares by an intermediate party provided that one party holds at least 25% in such intermediate party;
  • Loan representing more than 50% of the total paid-up capital of the other party, or security interests representing more than 10% of the loan (not applicable to independent financial institutions);
  • Control of the management decision making of the other party through appointment of high ranking staff;
  • Dependence on proprietary technologies (such as industrial property rights, technology know-how etc) of the other party in order to carry out activities;
  • Control of purchases and sales activities or services by the other party;
  • Control of the activities of the other party by other means, such as family members and relatives, etc, irrespective of the shareholding ratio as mentioned in point 1. above.

c) For EU countries, is the content of the documentation similar to that described in the EU Code of Conduct on transfer pricing documentation for associated enterprises (“EU TPD”)? If not, are taxpayers entitled to choose between the local requirements and the EU TPD?

Not applicable.

d) Do taxpayers which are not established in your jurisdiction need to undertake to provide any specific information upon request? Can your tax authorities require the taxpayer in your jurisdiction to provide information which is located in another state?

Taxpayers who are not established in China do not need to commit to provide specific information on the request of the tax authorities. If the tax authorities wish to obtain such information, they should either implement the information exchange procedures provided for in bilateral tax treaties, or ask the Chinese company to provide information related to foreign associated companies.

e) If comparable studies are to be provided, do the tax authorities generally accept regional benchmark studies (e.g. pan-European benchmark studies)?

Chinese law does not contain explicit provisions on this issue. The tax authorities do not exclude the possibility of applying benchmarks of companies in other Asian countries. However, we consider that such application would be quite limited.

f) What language(s) are to be used by taxpayers in submitting the transfer pricing documentation?

The documentation as well as any appendix must be submitted in Chinese. In the absence of a Chinese version, a Chinese translation must be submitted.

3. What is the deadline or timescale for providing transfer pricing documentation to the tax authorities (is it to be provided for example upon filing of the tax returns, at the beginning of a tax audit, or on the specific request of the tax authorities)?

Where requested by the competent tax authorities, the contemporaneous documentation must be submitted to tax authorities within 20 days.

As an exception, if a company with foreign investors has only limited functions and bears only limited risks in China (see question 1) this company must submit the documentation before 20 June of the following tax year.

In addition, a company that has been subject to transfer pricing reassessment in a given year shall provide the documentation before 20 June of the following tax year during the five year supervision period.

If the company fails to provide documentation or provides incomplete or false information, the tax authorities can impose a fine up to RMB 50,000 (approximately EUR 5,000), and the tax authorities have the right to make a transfer pricing reassessment in accordance with “arm’s length” principle or other reasonable methods. In addition, the tax authorities have the right to impose interest on the outstanding taxes.

5. Does the absence or incompleteness of documentation reverse the burden of the proof as regards the arm’s length character of the transactions?


A company which has been subject to transfer pricing reassessment has the right to apply for an adjustment eliminating any double taxation resulting from such reassessment within three years of receipt of the notice of reassessment. However, irrespective of this provision, the tax authorities will not make any adjustment in respect of tax already paid by the company which relates to passive income transferred abroad, such as royalties, rentals and interest.

Chinese law does not stipulate whether such an application for adjustment will be accepted after the documentation-related penalties have been imposed on the company.

Nicolas Zhu
Nicolas Zhu