Meaning
Regulatory guidelines define the strict criteria under which payments to foreign affiliates for service fees or royalties can be deducted. This document specifically focuses on the commercial benefit and substance requirements needed to approve intra-group transfers. Following State Taxation Administration Public Notice 2015 No 16, bureaus reject payments to entities that only have a mailbox address or lack management functions.
It targets excessive management fees that appear to be a way of moving surplus profit without business reason.
Service Standards
Work performed must provide direct economic value that the local company could not easily generate itself. According to State Taxation Administration Public Notice 2015 No 16, low value or redundant work cannot support high billing rates from the headquarters. If the support happens automatically for the group’s general benefit, the domestic site cannot pay a specific fee for it.
Taxpayer Evidence
Firms compile evidence of actual work products like reports, software codes, or marketing plans to satisfy the bureau. Under State Taxation Administration Public Notice 2015 No 16, the contract alone is never enough to prove that a service actually took place. Auditors look for time logs and employee communications that document the daily interaction between teams.
Penalty Rule
Non-compliant payments face reclassification as dividends, which usually triggers higher tax rates and non-deductibility. Implementing State Taxation Administration Public Notice 2015 No 16 requires the local team to review all service agreements before the end of the fiscal quarter. This check ensures only robust, necessary service bills reach the accounting ledger.
