• For each subsidiary, a separate, signed written agreement must set forth the service scope, fee quote, and total of charges. The agreements must be presented to the tax authorities.
• Agreements must be at arm’s length; otherwise the tax authorities can make adjustments.
• The subject agreements are not the same as cost sharing agreements (CSAs), although these can also be used.
For services provided by a parent company to its subsidiaries, the parent company must charge service fees based on the arm's-length principle, and the charges must be treated as normal service fees from a tax perspective. If the service charges between the parent company and its subsidiaries are not reasonable, the tax authorities can make tax adjustments.
For services provided by a parent company to its subsidiaries, there must be a signed agreement to set out, for example, the service scope, fee quote and total charges. Service fees incurred based on the service agreement must be treated as revenue of the parent company and deductible expenses of its subsidiaries for corporate income tax purposes.
When a parent company provides similar services to several subsidiaries, the parent company may charge service fees by entering into separate service agreements or shared service agreements with the subsidiaries. For shared services agreements, the service fees can be charged as the actual cost incurred plus an arm'-length compensation in accordance with paragraph 2 of article 41 of China’s corporate income tax law.
Subsidiaries are not allowed to claim a deduction from their corporate income tax liability for those management fees charged by the parent company.
To claim a corporate income tax deduction of service fees paid to the parent company, subsidiaries must provide to the in-charge tax bureau the relevant service agreements and other supporting documents. Otherwise, such service fees are not deductible for corporate income tax purposes.
As more multinational corporations are setting up national or regional hubs in China, shared services centres are becoming a focus for the SAT.
The recent guidance may reflect the fact that more Chinese multinational corporations are establishing a presence overseas and that the SAT may be interested in recovering costs incurred by Chinese headquarters to benefit and support subsidiaries around the world.
Written agreements and supporting documentation are required for subsidiaries to obtain deductibility for income tax purposes of payments made for these shared service. It is interesting that the SAT, as with other Asian tax authorities, appears to be continuing to resist allowing deductions for management fees,even those incurred by head offices that are located in China.
Steven Tseng (steven.tseng@kpmg.com.cn) KPMG
China service fees charged between parent and subsidiaries examined
