Meaning
Intra-group expense represents the cost of administrative and leadership services provided by a parent company to its subsidiary. Management charges cover functions such as strategic planning and human resources support that are centralized at the headquarters level. These fees must reflect the actual value of the services provided to be recognized by the tax and foreign exchange authorities.
Tax Deductibility
Regulations issued by the State Taxation Administration require that these costs meet the arm’s length principle. The subsidiary must demonstrate that the services were necessary for its operations and that the price matches what an independent firm would pay.
Pricing Verification
Documentation must be maintained to prove the nature and the frequency of the support received from the parent entity. Auditors look for a clear methodology used to calculate the fee such as a percentage of revenue or a cost plus margin approach. Any charge that appears to be a disguised dividend will be disallowed as a deductible expense.
The service agreement must be registered and the invoices must be supported by evidence of the work performed. Tax authorities often challenge these payments if the subsidiary has its own staff capable of performing the same functions.
Remittance Approval
Foreign exchange banks require a valid tax certificate before they will process the transfer of the funds to an overseas parent. This control ensures that the capital is not leaving the country without the proper assessment of corporate income tax.
