China Tax – Reporting of Contemporaneous Documentation of Related Party Transactions

Based on the compliance path, we are here to accompany you forward. In recent years, China tax authorities have maintained increasingly close scrutiny over related-party transactions, and the compliance preparation of relevant documentation has evolved from a "routine formality" into a professional and systematic endeavor. This involves multiple professional judgments, including functional risk analysis and pricing reasonableness justification; any oversight in any detail may expose an enterprise to potential tax risks. According to Article 43 of the Enterprise Income Tax Law of the People's Republic of China, when tax authorities conduct related-party business investigations, enterprises and their related parties, as well as other enterprises related to the related-party business investigation, shall provide relevant materials as prescribed. Based on this, Kaizen has carefully compiled and translated the key policy points into this document, hoping to provide you with a clear and practical reference.

1. What is contemporaneous documentation?
   
   Contemporaneous documentation refers to the supporting documents that an enterprise prepares in accordance with regulations when engaging in related-party transactions, covering pricing principles, fee standards, calculation methods, explanatory notes, and other evidentiary materials. Their purpose is to demonstrate to the tax authorities that the pricing of related-party transactions complies with the arm's length principle. Under current regulations, contemporaneous documentation mainly comprises the following three categories:
   

   1.1	Master file;
   1.2	Local file;
   1.3	Special issue documentation.

   
   Kaizen 's warm reminder: The three categories of documentation above each have independent triggering conditions. As long as an enterprise satisfies any one of the documentation preparation conditions, it shall file the corresponding documentation with the competent tax authority, and may be required to prepare multiple categories of documentation simultaneously. It is recommended that enterprises comprehensively assess their own related-party transaction situations and fully identify all preparation obligations.
   
   
2. Master file
   
   

   2.1	Scope of application of the master file According to the relevant provisions of China's tax laws and regulations, an enterprise shall prepare a master file if it meets any of the following conditions: The enterprise has engaged in cross-border related-party transactions during the year, and the ultimate holding enterprise that consolidates the enterprise's financial statements has already prepared a master file for its affiliated group.The total amount of the enterprise's related-party transactions during the year exceeds RMB 10 billion. The total amount of the enterprise's related-party transactions during the year exceeds RMB 10 billion.
   	Kaizen 's warm reminder: The above two conditions are in an "or" relationship—if either is satisfied, the enterprise shall file a master file with the competent tax authority. In practice, the master file has a relatively high application threshold and typically involves two types of enterprises: first, members of multinational enterprise groups that prepare a unified master file globally; and second, large domestic enterprises whose domestic related-party transaction volume exceeds RMB 10 billion.
   2.2	Main contents of the master The master file is primarily used to disclose the overall global business situation of the enterprise group to which the ultimate holding enterprise belongs. It focuses on presenting a full picture of the multinational enterprise's global operations at the group level. Its content is relatively independent and generally applicable, rather than targeting any specific related-party transaction. An enterprise shall provide specific descriptions and explanations in the following five aspects: Organizational structure of the enterprise; Business of the enterprise group; Intangible assets; Financing activities; Financial and tax status. Kaizen 's warm reminder: When preparing the master file, enterprises shall ensure that the disclosed information is true and accurate, and that the content remains consistent with the previous year's information, with particular attention paid to significant changes in organizational structure, intangible assets, and business layout. At the same time, enterprises shall strictly observe the 12-month preparation deadline and plan proactively; when determining whether preparation obligations are triggered, they shall comprehensively review the group's overall circumstances and related-party transaction amounts to ensure accurate judgment and thorough preparation.

   
   
3. Local file
   
   

   3.1

   Scope of application of the local file According to the relevant provisions of China's tax laws and regulations, an enterprise shall prepare a local file for all of its related-party transactions if the transaction amounts incurred during the year meet any of the following conditions: The transfer amount of tangible assets ownership (for processing with supplied materials, calculated based on the annual import and export customs declaration prices) exceeds RMB 200 million. The transfer amount of financial assets exceeds RMB 100 million. The transfer amount of intangible assets ownership exceeds RMB 100 million. The total amount of other related-party transactions exceeds RMB 40 million. Kaizen 's warm reminder: Local file preparation may appear to be merely a matter of checking conditions and assembling materials, but in practice there are several easily overlooked pitfalls that require special attention from enterprises. First, when calculating amounts, the four categories of related-party transaction amounts shall be accounted for separately, and shall not be aggregated; for processing with supplied materials, in particular, the calculation shall be based on the annual import and export customs declaration prices rather than the processing fee income. Second, when assessing conditions, the amounts covered by advance pricing arrangements may be deducted from the calculation base and shall not be included in the preparation threshold. Third, regarding time limit management, the local file shall be prepared by June 30 of the following year, shall be provided within 30 days from the date of the tax authority's request, and shall be properly preserved for 10 years for future reference.

   3.2

   Min contents of the local file According to the requirements of China's tax laws and regulations, when preparing the local file, the enterprise shall ensure that the disclosed information is comprehensive, accurate, and complete, with particular emphasis on the following elements: The enterprise's business substance, primarily reflected through descriptions of its organizational structure, management framework, business description, operational strategies, financial data, and information on reorganizations or intangible asset transfers that have affected or may affect the enterprise. Basic information on the enterprise's related parties and changes in related-party relationships. Detailed breakdowns of related-party transactions, business processes, and pricing impact factors. The business flow, physical flow, and capital flow at each link of the value chain related to the related-party transactions; the measurement of the contribution of region-specific factors to the enterprise's value creation; and the profit allocation principles and results across the entire chain. Outbound investments, related-party equity transfers, and related-party service transactions. Advance pricing arrangements and other relevant tax rulings already entered into by tax authorities in other countries (regions) outside China that are directly related to the enterprise's related-party transactions. Various factors considered in the comparability analysis, and the functions performed, risks assumed, and assets used by the comparable enterprises. The basis for selecting the transfer pricing method and its specific application process. Kaizen 's warm reminder: The quality of local file preparation directly affects the tax authorities' assessment of an enterprise's compliance with related-party transaction regulations. It is recommended that enterprises, when preparing the above materials, pay attention to the logical consistency of the data, ensuring that various sections corroborate each other and avoiding issues such as informational contradictions. At the same time, for matters involving cross-border related-party transactions, special attention should be paid to differences in tax rules between different jurisdictions, with advance risk assessment and countermeasure preparation.

   
   
4. Special issue documentation
   
   

   4.1

   Scope of application of special issue documentation Special issue documentation includes cost sharing agreement special issue documentation and thin capitalization special issue documentation. Specifically, where an enterprise enters into or executes a cost sharing agreement, it shall prepare cost sharing agreement special issue documentation. Where an enterprise's related-party debt-to-equity ratio exceeds the statutory threshold and it needs to demonstrate compliance with the arm's length principle, it shall prepare thin capitalization special issue documentation.

   4.2

   Main contents of special issue documentation According to the relevant provisions of China's tax laws and regulations: Cost sharing agreement special issue documentation mainly covers four core sections: the agreement documents, changes in participants and amendments to the agreement, detailed breakdowns of cost sharing and compensation payments, and comparative analysis of expected versus actual benefits. Thin capitalization special issue documentation mainly covers four core sections: the borrowing capacity of the enterprise and the group, terms and conditions of related-party debt financing, comparable market financing references, and supporting evidence for the arm's length principle. Kaizen 's warm reminder: The triggering conditions for special issue documentation are relatively clear, but in practice, instances of enterprises failing to fulfill their preparation obligations due to oversight or incorrect judgment are not uncommon. It is recommended that enterprises regularly monitor whether there are cost sharing arrangements in their related-party transactions, dynamically track the related-party debt-to-equity ratio, and initiate documentation preparation in a timely manner. At the same time, both the expected benefit calculation for cost sharing agreements and the comparable financing condition analysis in thin capitalization involve substantial professional judgment. Enterprises are advised to maintain thorough documentation records throughout the preparation process, preserving reasonable justifications for calculation bases and parameter selections for inspection by tax authorities if needed.

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Disclaimer All information in this article is only for the purpose of information sharing, instead of professional suggestion. Kaizen will not assume any responsibility for loss or damage.

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