Establishing Economic Employer Qualification for Foreign Staff Secondments to China
Establishing economic employer status under Bulletin 19 requires foreign entities to pass operational risk and cost management to local Chinese affiliates.
Intercompany Recharge
Meaning
Cross-border financial settlement schedules attached to service level agreements establish mechanisms for allocating operational costs between parent corporations and local subsidiaries. Finance departments utilize intercompany recharge transactions to transfer headquarters management expenses, software license fees, technical consulting charges and regional support costs to Chinese entities. State Administration of Foreign Exchange regulations mandate strict documentary proof, including contracts and tax payment certificates, before local banks execute foreign currency outbound remittances.
Deductibility of these payments against corporate income tax depends on proving that services provided direct commercial benefits to the local operating unit.
Settlement Protocol
Foreign exchange control procedures require detailed invoice verification prior to releasing outbound fund transfers. Accounting departments processing an intercompany recharge must present signed service contracts and proof of cost allocation methodologies to designated settlement banks. Bank compliance officers verify that payments match declared commercial scopes and do not cover shareholder management costs.
Payments lacking sufficient documentation face permanent remittance blocks from foreign exchange regulators.
Tax Requirement
Local tax bureaus inspect cross-border payments for applicable withholding income tax, value added tax, local surcharges and urban maintenance taxes. Executing an intercompany recharge obligates the Chinese subsidiary to withhold taxes before remitting net funds overseas.
Transfer Pricing
Arm’s length principles governed by tax administration rules dictate that intercompany charges must reflect fair market value without profit shifting. Establishing an intercompany recharge structure requires contemporaneous transfer pricing documentation defending allocation keys and profit markups. Tax authorities scrutinize management fee allocations, rejecting deductions for duplicate services or general corporate stewardship.
Audits resulting in tax adjustments trigger back taxes along with statutory interest penalties.