In the world of cross-border business, many Foreign-Invested Enterprises (FIEs) in China find themselves in a sudden "squeeze." The foreign tax authorities might knock on the parent company's door asking: "You’ve provided technology and branding to your China subsidiary for years—why haven't you charged them in royalties?"
In a rush to comply, a contract is drafted, and money is prepared for remittance. But hold on! In the eyes of tax bureaus, a contract is just "self-talk." To get both the Chinese and foreign authorities to nod in agreement, you need more than just a signature—you need two critical "Health Reports."
1. The Local File: Your Company's "Full-Body Physical Check"
Think of your company as a person. The Local File is your comprehensive, annual health checkup. It doesn’t just look at royalties; it scrutinizes every intercompany pulse—goods traded, loans made, and services rendered.
Its Role: To prove to the Chinese tax bureau (STA) that your overall business logic is sound and that you aren't using "creative accounting" to siphoning profits out of the country. It is your first line of defense against a full-scale tax audit.
2. The Royalty Benchmarking Study: The "Specialist Exam"
While the Local File is a general checkup, the Benchmarking Study is a deep-dive "Vision Exam" for your pricing. If the parent company demands a 5% royalty rate, the tax man will ask: "Why 5%? Why not 2%?"
Its Role: Using professional databases like BvD (TP Catalyst), or RoyaltyStat, ktMINE, this study hunts for "Fair Price Tags" in the global market. It finds similar third-party deals to prove your rate is consistent with what independent companies pay. It answers the most vital question: "Is this price fair?"
A Consultant's "Plain English" Summary:
The Contract establishes the "Legal Identity" (Making it official).
The Benchmarking Study justifies the "Price Tag" (Making it fair).
The Local File ensures "Global Compliance" (Making it safe).
Pro Tip: Never "guess" a royalty rate. If these new payments push your China subsidiary into a loss, you can bet the Chinese tax authorities will pay you a very "attentive" visit.
Our Advice: Before you remit that first payment, conduct a "pre-flight check." Ensure your rates satisfy the Italian tax man without making the Chinese tax man see red.
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.
+86 21 6256 7995
info@phcadvisory.com
