China Transfer Pricing Rules for Foreign Companies

Transfer pricing is a major focus of Chinese tax authorities. Foreign companies with related-party transactions must ensure compliance to avoid costly adjustments and penalties.

What Is Transfer Pricing?

Transfer pricing refers to prices charged between related parties for:

• Goods and products
• Services
• Intangible assets (IP, royalties)
• Financing (intercompany loans)

The Arm's Length Principle

Related-party transactions must be priced as if between independent parties:

• Comparable to market prices
• Reflect economic substance
• Supported by documentation

Documentation Requirements

Annual Reporting

• Related-party transaction forms
• Filed with annual tax return
• Required for all related-party transactions

Contemporaneous Documentation

Required if:

• Related-party transactions exceed ¥200 million
• Or cross-border transactions exceed ¥40 million

Master File and Local File

• Master file: Group-wide information
• Local file: China entity specific analysis
• Country-by-country reporting for large groups

Transfer Pricing Methods

• Comparable Uncontrolled Price (CUP)
• Resale Price Method
• Cost Plus Method
• Transactional Net Margin Method (TNMM)
• Profit Split Method

Common Issues

• Excessive management fees to parent
• High royalty payments
• Intercompany loan interest rates
• Service charges without substance
• Inadequate documentation

Tax Authority Powers

• Request documentation within 30 days
• Conduct transfer pricing audits
• Make pricing adjustments
• Impose penalties and interest

Penalties

• Tax adjustments with interest
• Late payment surcharge (0.05% daily)
• Special adjustment interest (benchmark + 5%)
• Penalties for non-compliance

Best Practices

• Prepare documentation contemporaneously
• Conduct benchmarking studies
• Review pricing policies regularly
• Consider Advance Pricing Agreements
• Maintain economic substance