The State tax bureau started to pay much attention on the non-trading payment to overseas since the last August. After their checking the previous transactions, around 1 billion RMB was found as the evaded tax.
On 18th March 2015, the new regulation named “Announcement of the State Administration of Taxation on Enterprise Income Tax Issues concerning the Disbursement of Expenses by Enterprise to their Overseas Related Parties” (hereinafter referred as to “Announcement No. 16”) was issued.
Shanghai Dongjin would like to share our understanding with you as the below points.
A. When the enterprise now makes the non-trading overseas payment, the more detailed documents should be provided including the signed agreement and other materials to prove it is a true and independent transaction.
B. The circumstance mentioned in the new regulation that the expense cannot be deducted before the annual taxable income is calculated.
1. The enterprises disburse expenses to their overseas related parties that fail to perform their functions or undertake the risks and that have no substantial operating activities;
2. Part of the transactions which are related to the labor expenses
- The enterprises pay for the services rendered by the overseas related parties, these services fail to enable the enterprises to obtain the direct or indirect economic benefits;
- the services that have no relation with the functional risks assumed by, or the operations of, the enterprises;
- the services such as the control, administration and supervision on the enterprises carried out by the related parties for the protection of the investment interests of the enterprises' direct or indirect investors;
- the services that are rendered by the related parties and have been paid for by the enterprises to the third parties or have been conducted by the enterprises themselves;
- the concrete services that are conducted for the enterprises by the related parties within the groups and are not accepted by the enterprises, even though the enterprises obtain extra benefits because they are affiliated to these groups;
- the services whose costs have been disbursed in other related transactions; and
- Other services that cannot, directly or indirectly, bring economic benefits to the enterprises.
3. Overseas payment for the royalty
- The disbursement of royalties by the enterprises to their related parties that only have the legal ownership of intangible assets and make no contributions to the abovementioned value creation is not subject to the independent transaction principle;
- An enterprise establishes a holding company or financing company overseas for the major purpose of financing and listing, and disburses royalties to their overseas related parties for the spinoff benefits arising from the relevant financing and listing activities;
C. The tax bureau can challenge the transaction within ten years from the due taxable year of the transaction.