Other BriefingsChina Transfer Pricing Documentation Deadline: Prepare Local File and Special Issue File by June 30
Under China’s transfer pricing documentation rules, companies must complete local and special issue files by June 30 following the year of related-party transactions. This article explains who must comply, key exemptions, and risks for non-compliance.
Under China’s transfer pricing documentation rules, enterprises engaging in related-party transactions must prepare and maintain contemporaneous documentation in the year following the transaction. This documentation includes the master file, local file, and special issue file, as required by the State Taxation Administration (STA).
Among these, the local file and special issue file must be completed no later than June 30 of the year following the related-party transaction year. In other words, for transactions that occurred in 2024, the documentation must be ready by June 30, 2025.
As the deadline nears, businesses should take proactive steps to assess their compliance obligations. In Part I of our two-part article series, we cover:
- Which enterprises are required to prepare local files and special issue files
- The preparation timeline and compliance steps
- Exemption thresholds and applicable relief
- Potential tax risks and consequences for non-compliance
Foreign-invested enterprises and domestic companies alike should not underestimate the importance of proper transfer pricing compliance, particularly amid tightening enforcement and growing scrutiny from China’s tax authorities.
Which enterprises are required to prepare local files and special issue files?
Under China’s transfer pricing documentation rules, not all enterprises are obligated to prepare the local file and special issue file. However, companies that meet specific thresholds or are engaged in certain types of cross-border activities must do so in compliance with regulatory expectations.
Local file
Enterprises are required to prepare a local file if any of the following conditions are met in the relevant fiscal year:
- Transfer of ownership of tangible assets exceeds RMB 200 million (US$27.6 million), based on import/export customs values for toll manufacturing transactions.
- Transfer of financial assets exceeds RMB 100 million (US$13.8 million).
- Transfer of ownership of intangible assets exceeds RMB 100 million (US$13.8 million).
- Total amount of other related-party transactions exceeds RMB 40 million (US$5.5 million).
In addition, enterprises engaged in single-function operations—such as toll manufacturing, contract R&D, or distribution—on behalf of overseas related parties are generally expected to maintain a reasonable profit level. If these entities report losses in a given year, they are required to prepare a local file for that year, regardless of transaction thresholds.
Special issue file
Special issue files are required under the following circumstances:
- Cost-sharing arrangements: Enterprises that sign or implement cost-sharing agreements must prepare documentation specific to such arrangements.
- Thin capitalization risks: Enterprises whose related-party debt-to-equity ratio exceeds regulatory thresholds must prepare documentation to demonstrate that the financing arrangements comply with the arm’s length principle.
Are there exemptions from preparing transfer pricing documentation?
Yes. China’s transfer pricing regulations provide specific scenarios under which enterprises may be exempt from preparing some or all categories of transfer pricing documentation. These exemptions aim to reduce compliance burdens for low-risk or purely domestic transactions, while still preserving the tax authority’s ability to review cross-border arrangements.
The key exemption scenarios are as follows:
Advance pricing arrangement (APA) coverage
Enterprises that have implemented an APA are not required to prepare the local file or special issue documentation for related-party transactions covered under the APA.
However, it should be noted that transactions not covered by the APA remain subject to the standard documentation requirements.
Domestic-only related-party transactions
Enterprises that only engage in related-party transactions with other domestic entities are exempt from preparing the transfer pricing documentation, including local file and special issue file.
Nonetheless, this exemption does not imply full immunity from scrutiny. If the transactions result in significant tax burden differences between the related parties, or if they reduce China’s overall tax revenue either directly or indirectly, the enterprise may still be subject to special tax adjustments.
In such cases, it is advisable for the enterprise to proactively prepare supporting documentation—similar in nature to the local file or special issue file—to demonstrate compliance with the arm’s length principle and reduce audit risk.
Capital thinness adjustment already declared
If an enterprise exceeds the regulatory threshold for related-party debt-to-equity ratios but has already made the necessary adjustments (for example, disallowed excess interest deductions) in its annual corporate income tax filing, it is not required to prepare the special issue file for thin capitalization.
These exemption provisions offer enterprises relief from onerous reporting obligations under qualifying circumstances, but companies must assess their situations carefully and ensure that any decision not to prepare documentation is well-supported and justifiable.
Timing and submission, and compliance risks
Enterprises subject to China’s transfer pricing documentation rules must observe strict deadlines for preparation and retain supporting files in accordance with regulatory requirements. Failure to comply may trigger serious tax consequences, including penalties, interest charges, and adjustments by tax authorities.
Documentation preparation deadlines
Local file and special issue file must be completed by June 30 of the year following the related-party transaction. These documents are not required to be submitted proactively but must be ready and available for inspection upon request.
Submission and retention obligations
Enterprises must submit transfer pricing documentation within 30 days upon request by the tax authority.
All documentation must be retained for 10 years from the date on which the tax authority requires it to be finalized. In the event of corporate restructuring, such as mergers or divisions, the obligation to retain the documentation transfers to the successor entity, that is, the enterprise resulting from the merger or the newly formed entity after the split.
Consequences of non-compliance
Enterprises that fail to meet documentation and reporting obligations may face the following tax risks:
- Administrative penalties: Failure to file transfer pricing documentation or related declarations within the prescribed timeline may result in a fine of up to RMB 2,000 (US$276). in more serious cases, fines can range from RMB 2,000 to RMB 10,000 (US$1,380), as stipulated under the Tax Collection and Administration Law.
- Taxable income assessment: Under Article 44 of the Corporate Income Tax Law, if a company fails to provide complete and accurate related-party transaction documentation, the tax authority may apply its own methods to assess the taxable income based on reasonable estimates.
- Higher audit risk: Companies that do not properly report related-party transactions face an increased likelihood of becoming targets for transfer pricing investigations.
- Interest penalties: In cases of special tax adjustments leading to additional tax payments, the tax authority may impose interest charges based on the benchmark loan interest rate published by the People’s Bank of China, plus an additional 5 percentage points.
- Disallowed deductions: If a company fails to register or document a cost-sharing agreement as required, the self-allocated portion of the cost cannot be deducted for tax purposes. Similarly, interest expenses exceeding the statutory related-party debt-to-equity ratio will not be tax-deductible if the enterprise fails to demonstrate that the terms are consistent with the arm’s length principle.
- Restrictions on APA applications: Enterprises that fail to submit the annual related-party transaction reporting forms in accordance with the rules may be barred from initiating or continuing negotiations for APA.
These compliance risks highlight the importance of timely preparation, accurate reporting, and robust documentation in managing transfer pricing exposures under China’s tax framework.
Stay compliant: Act before the June 30 deadline
China’s transfer pricing documentation rules are complex, and the consequences of missing key requirements can be costly. With the June 30 deadline approaching, companies engaging in related-party transactions must assess whether they are obligated to prepare the local file and special issue file, and act as soon as possible to ensure compliance.
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