Watch out: Related Party Transaction in China


​published on 13 July 2022 | reading time approx. 4 minutes


The release of Public Bulletin [2016] No.42 (hereafter referred as “the Circular”) has extended the number of related party transaction disclosure forms (hereafter referred as “RPT Forms”) from the original 9 tables to 22 tables. These RPT Forms provide a basis for tax authorities to assess the potential transfer pricing risks of the Chinese enterprises. 



Incorrectness or missing information in RPT Forms may increase the taxpayers’ TP risk exposures and trigger investigations from tax authorities, especially under the background of the implementation of big data a­na­ly­ti­cal technology by the Chinese Tax Authority. Therefore, RPT Forms shall be correctly disclosed in order to avoid potential challenges from tax authorities. Below is a summary of some commonly seen pitfalls noticed in the RPT Forms filing.

Missing to fulfill the filing obligation

In practice, companies may have a wrong impression that there is no obligation to file RPT Forms if the enter­prise only had transactions with domestic related parties during the fiscal year. However, both resident enter­prises that pay Corporate Income Tax (CIT) according to their financial records and non-resident enterprises that have an establishment or a place of business in China and settles CIT on actual basis are required to file RPT forms as long as they have related-party transactions during the year regardless of whether they are domes­tic or overseas related parties. Legal liabilities will occur if a company fails to perform the reporting obligation of RPT Forms. Taxpayers who fail to complete the tax declaration will be ordered by the tax autho­ri­ties to remedy before a set deadline and be subject to a fine which may lead to a decrease in its tax credit rating.

Misunderstanding in the definition of “related party”

Enterprises should disclose all related parties that have entered into transactions with the enterprises during the year of reporting and types of their relationships in the RPT Forms. Therefore, enterprises shall accurately distinguish related parties and types of related party relationship based on the seven types of related party relationships specified in the Circular, including equity control, financing control, royalty control, sales, pur­chase and service control, appointments or assignments control, relatives control as well as other substantial common interests.
In practice, taxpayers should also pay attention to the following points when identifying related parties:
  • the related party does not only apply to enterprises and organizations, but also to individual shareholders;
  • the substantial control, which is commonly seen in a Variable Interest Entity (VIE) structure, may also con­stitute a related party relationship and lead to declaration of RPT Forms. Shui Zong Zheng Ke Fa [2021] No. 69 stipulates that an enterprise constitutes related party relationship with other enterprises, organizations or individuals, if one party is able to control the relevant activities of the other party through contracts or other forms and obtain returns from it;
  • if an entity entered into related party transactions with a branch, the branch should be disclosed in the RPT Forms instead of its headquarters.
A misunderstanding in the related party definition may lead to the under-disclosure of the related party transactions, which may cause the enterprise in mis-judging whether it shall have the TP Documentation preparation obligation for the year. For enterprises which reach the TP Documentation preparation threshold but could not submit the prepared Documentation to the tax authority upon request, it will then lead to an initiation of TP investigation and an additional 5 percent penalty interest will be imposed on top of the addi­tional tax liabilities caused by the TP adjustments if any.

Incorrect information disclosed in the RPT Forms

Followings are the commonly seen errors in the RPT Forms filing which may lead to TP risks of the enterprises in China:
  1. Incorrect disclosed segment financials 

    The Financial Analysis of Enterprise’s Annual Related Party Transactions Form is one of a MUST filled RPT Form for enterprises, which requires to disclose the segment financials of domestic and overseas related and non-related party transactions. The significant gap between the profitability in each segment may trigger potential transfer pricing risks.

  2. Missing tick of the status of the preparation of the TP documentation
    Enterprises shall evaluate if they have met the requirements for the preparation of contemporaneous TP documentation in China, i.e. Local File, Master File, Special Issue File, and tick the corresponding box in the Summary of Related Party Transactions Form. It will trigger the tax authorities’ attention if the amount of related party transactions exceeds the thresholds for the preparation of contemporaneous TP documentation, but taxpayers do not check the box of the obligation notification. Furthermore, if the enterprise is obliged to prepare Master File (e.g. having annual related party transactions over RMB 1 billion), it is suggested to pre­pare a Chinese translation of Master File in time, which we do see that many enterprises have be requested by the tax authorities for submission in practice.
  3. Incorrect classification of the related party transactions
    The correct classification of the different types of related transactions is a prerequisite for filling out the corresponding RPT Forms. Enterprises shall categorize the related party transactions into the five types stipulated in the Circular which are:
    • transfer of ownership or use right of tangible assents,
    • transfer of financial assets, 
    • transfer of ownership or use right of intangible assets, 
    • financing, 
    • services.
For example, enterprises that are involved in toll manufacturing shall pay special attention to the selection of the correct RPT Forms. Toll manufacturing is not characterized as “service”, but shall be disclosed in the Transfer of Ownership of Tangible Assets Form. Taxpayers shall select “Raw Materials – Toll Manufacturing” (calculated based on the customs declaration import prices for the year) or “Product (Commodity) – Toll Manu­facturing” (calculated based on the customs declaration export prices for the year) in the form. An incorrect classification of the related party transaction may lead to the wrong assessment of whether the enterprise has met the TP Documentation Preparation threshold.
Furthermore, if an enterprise is involved in intercompany financing activities such as cash pooling or guaran­tees for third party loans, the relevant transactions shall also be filed in the Financing Form and shall be inclu­ded into the related party debt-equity ratio. If the calculated ratio exceeds the SAFE-Harbor ratio (e.g. 2:1 for non-financial enterprises), a Special Issue File for thin capitalization is required for those enterprises in order to demonstrate that the intragroup financing arrangement conforms to the arm’s length principle. 
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