Cross border transactions usually can be subjected to one of the below categories:  

1. Service Contracts with Foreign Suppliers or Clients 

2. Import and Export with Foreign Suppliers or Clients 

3. Global Management Expense Distribution 

While cross-border transactions come in various forms, this guide focuses on those involving global management expenses. This scenario occurs when a company's headquarters allocates operational costs to its subsidiaries worldwide. Consequently, subsidiaries must make cross-border payments to the headquarters to meet this obligation. 

Navigating China's Regulatory Landscape 

Let's consider a Chinese subsidiary making a cross-border payment for management fees to its parent company. Here's what the Chinese authorities might examine: 

• Tax Bureau Concerns: Transfer Pricing - Authorities ensure the transaction adheres to the "arm's length principle" meaning management fees charged should resemble what an unrelated party would charge for similar services. 

• State Administration of Foreign Exchange (SAFE) Regulations - SAFE may scrutinize transactions exceeding USD 50,000. 

What Companies Need to Know？ 

Companies can ensure a smooth process by: 

• Obtaining Proof Documents - The headquarters should provide documentation demonstrating the cost allocation method, its reasonableness, and and the benefits derived by the subsidiary from the services represented by these fees. 

• Demonstrating Reasonableness - According to Article 16 of SAT Announcement No. 6, 2017, services provided by associated companies (such as headquarters and subsidiaries) must yield tangible benefits to the recipient. This implies services should provide clear economic advantages, akin to those an independent company would offer. Transactions failing to meet these criteria may undergo tax adjustments. 

By adhering to these guidelines, companies can navigate cross-border transactions for management expenses more efficiently and ensure compliance with Chinese regulations. 

At PHC Advisory, we can offer you full support on matters regarding doing business in China, or any other issues your business may face. If you would like to know more about policies relevant to your business in Italy or Asia, please contact us at info@phcadvisory.com.  

PHC Advisory is a company of DP Group: an international professional services conglomerate of companies with approximately 100 experienced professionals worldwide. We offer comprehensive services in tax, accounting, and financial consulting, including financial supervision, financial audit, internal audit, internal control over financial reporting, and support for audited financial statements and annual audits, ensuring clients' financial transparency and compliance. 

Would you like to learn more about the business environment in China? Click the link and download our Practical Guides on Amazon! 

The content of this article is provided for informational purposes only, financial advice must be tailored to the specific circumstances on a case-by-case basis, and the contents of this article do not legally bind PHC Advisory with the reader in any way. 

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