Public Notice on Matters Regarding Refining the Filing of Related Party
Transactions and Administration of Contemporaneous Transfer Pricing
Documentation
Public Notice of the State Administration of Taxation [2016] 42
To refine the filing of related party transactions and the administration of contemporaneous transfer pricing documentation (hereinafter referred to as the “contemporaneous documentation”), the Public N
otice is hereby issued in accordance with the relevant provisions of “Enterprise Income Tax Law of the People’s Republic of China” (hereinafter referred to as the “Enterprise Income Tax Law”) and its implementation regulations, and “The Tax Collection and Administration Law of the People’s Republic of China” (hereinafter referred to as the “Tax Collection and Administration Law”) and its implementation regulations.
1.    A tax resident enterprise that pays Enterprise Income Tax according to its
financial records and a non-tax resident enterprise that has an establishment or a place of business in China and settles Corporate Income Tax based on its actual accounts shall, at the time of submitting its annual Enterprise Income Tax return, report related party transactions based on its dealings with related parties, and file the “People’s Republ ic of China Enterprise Annual Reporting Forms for Related-Party Transactions (2016 version)”.
2. Any of the following relationships of an enterprise (one party) with other
enterprises, organisations or individuals (the other party) shall constitute a “related party relationship” as stipulated in this Public Notice :
(i) One party directly or indirectly owns 25% or more shares of the other party;
or a common third party directly or indirectly owns 25% or more of shares of
both parties.
Where one party indirectly holds the other party’s shares through an
intermediate party, so long as it owns 25% or more shares of the
intermediate party, the percentage of the other party’s shares held by it is
equal to the percentage of the other party’s shares held by the intermediate
party.
Where two or more natural persons, who are spouses, related by lineal consanguinity, siblings, or in other custodianship/family maintenance relationships, hold the shares of a same enterprise, the percentage of shares held by them shall be aggregated in the calculation to determine related party relationship.
(ii) One party owns shares of the other party, or a common third party owns shares of both parties, ev
en though the percentage of shares held in either situation is less than the percentage as specified in item (i), the total debt between both parties accounts for 50% or more of either party’s tota l paid-in capital, or 10% or more of one party’s total debt is guaranteed by the other party (except for loans or guarantees from or between independent financial institutions).
Ratio of total debt to paid-in capital = annual weighted average debt / annual weighted average paid-in capital, where:
n(book value of debt (i) x Annual weighted average debt =
∑=1i
corresponding number of days outstanding / 365;
n(book value of paid-in Annual weighted average paid-in capital =
∑=1i
capital (i) x corresponding number of days invested) / 365.
(iii) One party owns shares of the other party, or a common third party owns shares of both parties, even though the percentage of shares held in either situation is less than the percentage as specified in item (i), the business operations of one party depend on the proprietary rights, such as patents, non-patented technological know-how, trademarks, copyrights, etc., provided by the other party.
(iv) One party owns shares of the other party, or a common third party owns shares of both parties, even though the percentage of shares held in either situation is less than the percentage as specified in item (i), the business activities, such as purchases, sales, receipt of services, provision of services, etc., of one party are controlled by the other party.
The aforementioned “controlled” refers to the case where one party has the right to make decisions on the other party’s financial and operational policies and can therefore derive benefits from the other party’s operations.
(v) More than half of the directors or senior management (including secretaries of the board of directors of listed companies, managers, deputy managers, financial controllers and other personnel specified in the company’s articles of association) of one party are appointed or assigned by the other party, or simultaneously serve as directors or senior management of the other party;
or more than half of the directors or senior management of both parties are appointed or assigned by a common third party.
(vi) Two natural persons who are spouses, related by lineal consanguinity, siblings, or in other custodianship/family maintenance relationships have one
of the relationships as specified in items (i) to (v) with one party and the other
party respectively.
(vii) Two parties substantially have common interests in other ways.
Except for item (ii) in this Article, the aforementioned related party relationship should be recognized for the period during which it exists, in the event it changes during the filing year.
3. Any shareholding by the State or association through assignment of directors or
senior management by the state-owned assets management authorities, and therefore qualified as the relationship as specified in Items (i) to (v) of Article 2, will not be deemed to constitute a “related party relationship” as specified in this Public Notice.
4. Related party transactions mainly include:
(i) Transfer of the right to use or ownership of tangible assets. Tangible assets
include merchandise, products, buildings, transportation vehicles, machinery
and equipment, tools, apparatus, etc.
(ii) Transfer of financial assets. Financial assets include accounts receivables, notes receivables, other receivables, equity investments, debt investments,
derivative financial instruments, etc.
(iii) Transfer of the right to use or ownership of intangibles. Intangibles include patents, non-patented technological know-how, trade secrets, trademarks,
brand names, customer lists, sales channels, franchise rights, government
licenses, copyrights, etc.
(iv) Financing. Financing includes all types of long-term and short-term loans (including group’s cash
pool), guarantees, all types of interest-bearing
advance payments and deferred receivables or payables, etc.
(v) Services. Services include market survey, marketing planning, agency, design, consulting, administrative services, technical services, contract
research and development, maintenance services, legal services, financial
services, audit, recruitment, training, centralised procurement, etc.
5. Tax resident enterprises that fall into any of the following categories shall file the
Country-by-Country Report at the time of submitting their “Annual Related Party Transactions Reporting Forms”:
(i) The resident enterprise is the ultimate holding company of a multinational
enterprise’s (hereafter referred to as the “MNE”) group having total
consolidated group revenue of more than 5.5 billion RMB during the fiscal
year immediately preceding the reporting fiscal year as reflected in its
consolidated financial statements for such preceding fiscal year.
Ultimate holding company is the enterprise that can consolidate the financial
statements of all constituent entities that belong to its MNE group and cannot
be included in the consolidated financial statements of another enterprise.
Constituent entities shall include:
a. Any entity that is included in the consolidated financial statements of the
MNE group.
b. Any entity that would be included in the consolidated financial statements
of the MNE group if equity interest in such entity were traded on a public
securities exchange.
c. Any entity that is excluded from the consolidated financial statements of
the MNE group solely on size or materiality grounds.
d. Any permanent establishment that prepares    a separate financial
statement.
(ii) The resident enterprise that has been appointed by the MNE group to file the Country-by-Country Report.
The Country-by-Country Report is to disclose information relating to the global income, taxes and business activities of all constituent entities of the MNE group to which the ultimate holding company belongs on a country-by-country basis. 6. For a MNE group whose ultimate holding company is a resident enterprise in
PRC, if its information is related to national security, it can be exempted from filing the Country-by-Country Report in whole or in part in accordance with the applicable laws and regulations.
7. Tax administrations may exchange the Country-by-Country Report in accordance
with tax treaties, agreements or arrangements that PRC has entered into.
submitting
8. For an enterprise that is not required to file the Country-by-Country Report under
the provisions of Article 5 of this Public Notice, tax administrations can request the enterprise to provide the Country-by-Country Report during a special tax investigation if the MNE to which the enterprise belongs is required to prepare the Country-by-Country Report in accordance with the relevant regulations of another country and one of the following conditions is met:
(i) The MNE has not filed the Country-by-Country Report to any other countries.
(ii) Although the MNE has filed the Country-by-Country Report to another country, there is no mechanism in place to exchange Country-by-Country
Report between China and that country.
(iii) Although the MNE has filed the Country-by-Country Report to another country, and there is    a mechanism in place to exchange the
Country-by-Country Report between China and that country, the
Country-by-Country Report has not been successfully exchanged to China.
9. Enterprises that encounter actual difficulties in filing the “Annual Reporting Forms
for Related Party Transactions” on time as required may apply for an extension of time in accordance with relevant provisions of the Tax Collection and Administration Law and its implementation regulations.
10. Enterprises shall, in accordance with Article 114 of the implementation
regulations of the Enterprise Income Tax Law, prepare contemporaneous documentation with respect to their related party transactions for each tax year and submit the documentation upon the tax administration’s request.
Contemporaneous documentation may include master file, local file and special issue file.
11. Any enterprise that meets one of the following criteria shall prepare a master file :
(i) The enterprise that has conducted cross-border related party transactions
during the tax year concerned, and the MNE group to which the ultimate holding company that consolidates the enterprise belongs, has prepared a master file.
(ii) The annual total amount of the enterprise’s related party transactions exceeds
1 billion RMB.
12. The master file is to provide an overview of the global business operations of the
MNE group to which the ultimate holding company belongs, and shall include the following information:
(i) Organisational structure
Chart illustrating the global organisational structure and ownership structure
of the MNE group, and the geographical locations of all constituent entities.
A constituent entity refers to any operating entity of the MNE group, including
corporations, partnerships and permanent establishments, etc.
(ii) Description of MNE’s business(es)
a. A description of the MNE’s business, including important value drivers of
business profit.
b. A description of the supply chain and main geographic markets for the
group’s five largest products or service offerings by turnover plus any
other products or services amounting to more than 5 percent of group
turnover. The required description could take the form of a chart or a
diagram.
c.    A list and brief description of important service arrangements between
constituent entities of the group, other than research and development
services, including a description of the capabilities of the principal
locations providing important services and transfer pricing policies for
allocating service costs and determining prices to be paid for intra-group
services.

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