Transfer pricing in China

Transfer pricing concerns the prices charged between associated enterprises established in different tax jurisdictions for their intercompany transactions. Specifically, any Chinese taxpayer engaged in related party transactions with other group entities is required to demonstrate that such transactions are conducted in a manner consistent with the “arm’s length standard” – under which taxpayers should be able to demonstrate that they transact with related parties in a similar manner, under comparable conditions as they would with third parties.

In China, the relationship threshold for transfer pricing rules to apply between parties is low compared to other countries. All transactions between the HQ and its China-side entity should be conducted based on the arm’s length principle, as the two are related parties according to Chinese tax laws. From a transfer pricing perspective, taxpayers operating in China have to be aware of their tax filing obligations. This consists of two parts: (a) ensuring that related party transactions are appropriately disclosed in the tax return; and (b) preparing and maintaining detailed transfer pricing documentation, if required.

When filing annual tax returns, all resident enterprises under the scheme of tax assessment by accounts inspection and non-resident enterprises establishing organizations or premises in China, should submit the Enterprise Annual Reporting Forms for Related Party Transactions of the People’s Republic of China, which in total consists of 22 separate forms. Of the 22 forms, six are country-by-country reporting forms, which must be prepared bilingually, while the other 16 must be prepared in Chinese. These should be submitted in Chinese by May 31 of the following year (the same deadline as annual tax returns).

In addition to filing the Related Party Transaction Forms, enterprises exceeding relevant transaction threshold (except those that are covered by an advance pricing agreement or that only transact with domestic related parties) should prepare and maintain a contemporaneous transfer pricing documentation, prepared in line with Chinese transfer pricing regulations. Although this report need not be submitted as part of the tax return, it must be provided to the local tax bureau within 30 days upon request. Note that the tax authorities can make special tax adjustments and levy additional tax and penalties to include years when documentation may not have been strictly required. The limitation period is up to 10 years. Correlative relief under a double tax treaty cannot be claimed for any interest or penalties.


Scope of Enterprises to Prepare Contemporaneous Documentation in China


Scope of enterprises


Master file

  • Enterprises that make cross-border related party transactions during the year, and the ultimate holding company that consolidates the enterprise’s financial statements has prepared the master file; or
  • Enterprises with annual related party transactions that amount to RMB 1 billion (US$142 million) and above.

Within 12 months of the end of the fiscal year for the group’s ultimate holding company

Local file

  • Enterprises with annual related party transactions for transferring the ownership of tangible assets that exceed RMB 200 million (US$28 milllion);
  • Enterprises with annual related party transaction for the transfer of financial assets exceeding RMB 100 million (US$14 million);
  • Enterprises with annual related party transaction for the transfer of ownership of intangible assets that exceed RMB 100 million (US$14 million);
  • Enterprises with other types of related-party transactions that exceed RMB 40 million (US$5.7 million) in total; or
  • Single function companies that incurred a loss should prepare the local file regardless of the annual related-party transaction amount, including both domestic and cross-border transactions.

Before June 30 of the year that follows the related party transaction

Special file

  • Enterprises entering cost sharing arrangements with related parties; or
  • Enterprises that need to state whether arm’s length principle is complied with due to related party debt equity ratio exceeding the standards.

Before June 30 of the year that follows the related party transaction

China foreign currency controls

China implements a strict system of capital controls, limiting the inflow and outflow of foreign currency. This system distinguishes between transactions made under an enterprise’s current account and capital account, and requires foreign investors to open separate bank accounts for the two. The SAFE and its local branches are the bureaus in charge. The SAFE divides foreign currency transactions into two separate categories: those under the current account and those under the capital account. Current account foreign currency transactions may involve the import and export of goods and services, earnings from interest or dividends from portfolio securities and regular transfers. Capital account transactions are mainly related to foreign direct investment (i.e. changes in a company’s registered capital), the purchase and sale of equity or debt securities, and trade credit or loans. In general, capital account transactions need approval from the SAFE, whereas current account transactions can be made directly through the bank.

[tips title="Important Tip"]Currently, FIEs are allowed to convert up to 100 percent of foreign currency in their capital account into RMB at their own discretion. [/tips]

However, the SAFE reserves the right to regulates the percentage of foreign currency a company may have as part of its capital account. These fluctuate according to China’s Balance of Payments, which refers to transactions between the entities and individuals of two countries.

 The following income are allowed to be put in the capital account:

  • Foreign exchange capital transported from overseas or by foreign investors;
  • Foreign exchange capital for security deposits of overseas remittances;
  • RMB funds returned after legal transfers (or funds returned as a result of revoked transactions); and
  • Received interest income (must be approved by SAFE certified bank).

The following usages are still strictly prohibited to justify the conversion of foreign exchange to RMB currency:

  • Expenditure beyond business scope or state laws/regulations, directly or indirectly;
  • Investing in securities or other financial products not secured by the bank, directly or indirectly (unless currently existing laws or regulations state otherwise);
  • RMB entrusted loans to non-related enterprises (unless included in the company’s business scope); and
  • Constructing or purchasing real estate not for the company’s use (unless the company deals in real estate as part of its business activities).

Custom duties in China 

Customs duties include import duties and export duties, which are computed either on an ad valorem basis or quantity basis. Import duty rates consist of most-favored-nation (MFN) duty rates, conventional duty rates, special preferential duty rates, general duty rates, tariff rates for quota items, and provisional duty rates. Among others, MFN duty rates are the most commonly adopted import duty rates. They are much lower than the general rates which apply to non- MFN nations. The complete list of products affected by MFN duty rates can be found in China’s Customs Tariff Implementation Plan, which is subject to yearly update.

The amount of import taxes and customs duty payable is calculated based on the price or value of the imported goods. This value is called the duty paying value (DPV). DPV is determined based on the transacted price of the goods.

Import taxes and duties can be calculated after determining the DPV and the tax and tariff rates of the goods. The formulae are:

Ad valorem basis:




Compound formula:


Export duties are only imposed on a few resource products and semi-manufactured goods. In 2021, China imposes export duties on 107 items including lead ores and concentrates, non-alloy aluminum strip, benzene, etc. The tax base for export duties is the same as import duties, i.e. the DPV. The DPV for export duties is based on the transaction price, i.e., the lump sum price receivable by the domestic seller exporting the goods to the buyer. Export duties, freight-related expenses, and insurance fees after loading at the export spot, and commissions borne by the seller, are excluded.

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