Meaning
Commercial contracts between an onshore Chinese entity and a foreign service provider govern the provision of technical, administrative, management, or consulting services from offshore. A cross border service agreement must be registered with the local tax bureau and the State Administration of Foreign Exchange before any payments can be remitted offshore to the foreign provider. This instrument defines the scope of work, fee structure, intellectual property rights, and tax allocation between the contracting parties.
It does not apply to contracts for the physical import of merchandise or the licensing of trademark rights.
Withholding Requirement
Onshore subsidiaries must withhold enterprise income tax and value-added tax before remitting service fees. The cross border service agreement must clearly state which party bears these tax liabilities to avoid disputes during bank clearance. Local tax bureaus inspect these agreements to ensure that transfer pricing rules are followed.
Operational Approval
Commercial banks require the contract, tax payment certificates, and the official invoice to process the remittance. When a cross border service agreement involves large amounts, banks conduct a detailed review to ensure that the services were actually rendered. This verification prevents the disguised distribution of profits to offshore parent companies.
Substantive Delivery
Tax audits frequently target agreements where the services provided lack clear economic substance. If the tax authority determines that the cross border service agreement is a sham, it denies the tax deduction and treats the remittance as a dividend. This assessment depends on the existence of tangible work products like reports or technical data.
