Navigating Chinese Economic Employer Rules under STA Bulletin 19 Secondments
STA Bulletin 19 exempts 1:1 secondment salary reimbursements from Corporate Income Tax provided domestic entities maintain direct economic control without markups.
Cost Reimbursement
Meaning
Intercompany accounting mechanisms allow parent corporations to reallocate operational expenses incurred on behalf of foreign subsidiaries back to the benefiting operational entities. Under Chinese corporate tax rules, cost reimbursement requires clear contractual authorization, direct benefit demonstration and pass-through charges calculated without profit markups. Tax bureaus audit these expense allocations strictly to ensure foreign parent companies do not shift profits out of domestic entities under the guise of shared operational costs.
Inadequate documentation leads to non-deductibility of expenses and potential withholding tax assessments on outbound remittances.
Markup Limit
Cross-border administrative expense allocations must reflect exact cost structures without profit margins added by foreign affiliates. Executing a cost reimbursement transaction requires zero-markup invoicing backed by primary third-party vendor receipts. Tax officers disallow expense deductions when invoices include profit surcharges.
Transfer Pricing
Shared services and administrative support expenses demand transparent allocation keys based on objective operational metrics. Utilizing cost reimbursement frameworks obligates domestic subsidiaries to maintain transfer pricing documentation proving the economic necessity of shared functions. Management fees disguised as cost recharges face immediate tax disallowance during routine annual audits.
Deduction Evidence
Evidentiary standards require domestic tax paying entities to retain detailed cost breakdowns, time allocation sheets and third-party invoices. Corporate income tax deductions for cost reimbursement depend on proving that services delivered real economic benefit to Chinese operations. Foreign exchange banks block remittance requests when corporate applications lack detailed service allocation agreements.
Domestic enterprises failing to substantiate shared service benefit face income tax adjustments and interest penalties on past deductions. Retaining full deductibility requires aligning intercompany service contracts with State Taxation Administration transfer pricing guidelines.