BEPS China: Services Rendered to Any China-Based Entity Must Provide an Economic Benefit
According to a report issued by China-Briefing.com available here (by Dezan Shira & Associates; Legal Editor: Steven Elsinga), the State Administration of Taxation (SAT) indicated on March 18, 2015:
“Services rendered to the China-based entity by the overseas related party must enable the China-based entity to directly or indirectly gain economic benefit. If this is not the case, these expenses may not be deducted.
Specifically, these include:
- Services irrelevant to the operations of the company
- 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.
- Services provided by the related party, that the China-based entity has already bought from another party or has performed itself.
- Services by the related party that have already been paid for in previous affiliated transactions.
- Benefits that the China-based entity enjoins as a consequence of being part of a group of companies, but that does not constitute a service rendered by the overseas entity. An example would be that the China-based entity is able to secure better terms for financing by virtue of it being part of a larger group of companies, which would increase the lender’s confidence.
- Other services that do not provide the China-based entity with any economic benefit.”
According to the report, the new SAT policy also indicates that royalty payments arising from any intangible property by a China-based company to a related party will be disallowed if the related party did not play a role in its creation.
In short, China takes the position that such a transaction does not comply with the arm’s length principle.
Full credit goes to China-Briefing.com available here (by Dezan Shira & Associates; Legal Editor: Steven Elsinga).
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