Laws of the People's Republic of China

the State Administration of Taxation

Circular of the State Administration of Taxation about Further Strengthening the Management of Examination and Approval of Pre-tax Deduction of Management Fees Withdrawn by Head Offices

Guo Shui Han [2005] No. 115

The bureaus of state tax and bureaus of local tax of all provinces, autonomous regions, municipalities directly under the Central Government and cities specifically designated in the state plan, all departments of the State Administration of Taxation:

Since the implementation of the Measures for the Examination and Approval of the Pre-tax Deduction of Management Fees Withdrawn by Head Offices (No. 177 [1996] of the State Administration of Taxation) and the Supplementary Circular on the Measures for the Examination and Approval of the Pre-tax Deduction of Management Fees Withdrawn by Head Offices (No. 136 [1999] of the State Administration of the Taxation) (hereinafter referred to as the Two Documents), the relevant organs in various places have reported some problems. For the purpose of further strengthening the administration of management fees of head offices and regulating the pre-tax deduction of management fees of head offices, relevant issues are hereby notified as follows:

1.

The administration of examination and approval of management fees of head offices shall be strengthened and regulated

The tax authorities of all levels shall carefully fulfill the relevant requirements as prescribed in the Two Documents and shall further strengthen and regulate the management of examination and approval of the management fees withdrawn by head offices.

(1)

Each tax authorities shall, in strict accordance with the Two Documents, administrate the management fees according to the conditions for the head offices' withdrawal of management fees. As to a head office that does not meet the relevant conditions, the tax authorities may not allow it to deduct the management fees withdrawn by it before it makes payment of tax.

(2)

As to a head office that meets the conditions for withdrawing management fees, when it files an application with the tax authorities, which is responsible for the examination and approval, for the pre-tax deduction of the management fees within a specified time limit, it shall simultaneously submit the following materials:

(a)

An application for withdrawing head office management fees;

(b)

The tax registration certificates (photocopies) of the head office and all its subordinate enterprises and branches (hereinafter referred to the enterprises); in the second year, only the photocopies of the tax registration certificates of the newly established enterprises are required;

(c)

The head office's tax return for the previous year, financial accounting statements and detailed statements on the expenses of income from the management fees;

(d)

The head office's tax return, financial accounting statements and detailed account on income and expenses of management fees for the first half of the current year, and detailed list on the anticipated expenses of management fees for the second half of the year;

(e)

The name list of all the enterprises who are apportioned management fees, tax return for the first half of the current year, sales income in the first half year, anticipated sales income for the whole year, anticipated increase rates of the whole-year sales income and profit, method and amount of apportioned management fees;

(f)

The basis and method for the calculation of the expenses of management fees of the current year (including the actual expenses in the first half year and the planned expenses for the second half year); and

(g)

An account of the increase or reduction of management fees for the current year and the reasons thereof.

An enterprise, which is subject to the examination and approval of the tax authorities at the provincial level or below, need not submit the materials to the tax authorities which have been obtained by the tax authorities.

(3)

The management fees withdrawn and deducted by the head office prior to tax payment shall be apportioned by all of its solely-funded subordinate enterprises (including the slightly profit-making enterprises, loss-incurring enterprises, and enterprises) according to the same rate based on the gross income. The enterprises may not negotiate and make adjustment among themselves about apportionment rate and the amount of pre-tax deduction of management fees.

(4)

The operating income and non-operating income of the head office, including the incomes from the lease of houses, interest income on national debts, interest income on deposits, income from overseas investments (including investments to its subsidiary enterprises) shall be deducted from the amount of pre-tax deduction of management fees withdrawn by the head office.

(5)

The scope and criterions of the head office management fees shall be implemented in strict accordance with the provisions on enterprise income tax as well as the requirements prescribed in the Two Documents. The wages, bonuses and other expenses paid to the employees by the head office on behalf of its subsidiary enterprises shall be counted as the expenses of its subsidiary enterprises in accordance with the relevant provisions, and shall not be included in the head office management fees. The tax authorities shall, on the basis of this, determine the amount of management fees needed by the head office.

(6)

The increase of amount of management fees shall be controlled in strict compliance with relevant provisions and the head office shall be urged to try its best to increase incomes and reduce the expenditure of management fees.

(7)

The competent tax authorities shall strictly verify the authenticity, reasonableness and completeness of the materials submitted by the head office. If the materials don't meet relevant requirements, it shall demand the applicant to make an explanation or provide supplementary materials; if they still do not meet relevant requirements, the application shall not be approved. The verification shall be focused on the following:

(a)

Whether the head office meets the conditions for withdrawing management fees;

(b)

Whether or not the head office has provided the name list of all of its subordinate enterprises (including the slightly profit-making enterprises, loss-incurring enterprises, and tax-deductible-and-exempt enterprises) and other relevant materials;

(c)

Whether the enterprises that share the management fees meet the conditions for solely-funded enterprises;

(d)

Whether the scope and criterions of the expenses of management fees meet relevant requirements or not;

(e)

The items with relatively large amount of expenses of management fees or with relatively big changes as well as the reasons therefor;

(f)

Whether or not the rate, apportioned amount, increase rate of the management fees withdrawn by the head office meet relevant requirements; and

(g)

Whether or not the tax return for the previous year has independently reflected the incoming of management fees.

2.

The administration of tax collection relating to head office management fees shall be strengthened and regulated

The management fees withdrawn by the head office shall be included in the normal administration of tax collection.

(1)

The head office shall, in accordance with relevant provisions on enterprise income tax, file a tax return, correctly calculate all incomes, costs and expenses as well as the taxable income and tax amount payable. The head office management fees withdrawn upon approval of the tax authorities shall not directly offset or be deducted from the expenses of the head office. Instead, its full amount shall be filled in the column ?C "Other Incomes" of the tax return for the annual enterprise income tax and the amount of "Income from Withdrawal of Management Fees" shall be clearly indicated in the detailed list.

(2)

The competent tax authorities shall carefully examine and check the business accounting of the incomes and expenses of the management fees withdrawn by the head office as well as information about the filing of tax returns and payment of taxes. If it discovers that the head office violates relevant taxation provisions, it shall order it to make correction and punish it in accordance with the Law on the Administration of Tax Collection and other tax collection provisions.

(3)

The competent tax authorities shall strengthen the control and check over the subordinate enterprises that share the management fees of the head office. When a subordinate enterprise that shares any management fees of the head office files a tax return, it shall submit the official reply (photocopy) concerning the examination and approval of the management fees issued by the competent tax authorities. Without approval of the tax authorities, or failing to provide an official reply (photocopy) concerning the examination and approval of the management fees issued by the competent tax authorities, it may not make pre-tax deduction of the part of head office management fees it has apportioned.

3.

The power of examination and approval shall be adjusted reasonably

With a view to further strengthening and regulating the management of examination and approval of head office management fees, the power of examination and approval of the pre-tax deduction of head office management fees shall be adjusted properly.

(1)

In case the head office and the subordinate enterprises which share its management fees are not located in the same province (autonomous region, municipality directly under the Central Government) and if the amount of management fees, which the head office applies for withdrawing, is 20 million Yuan or more, the pre-tax deduction of management fees thereof shall be subject to the examination and approval of the State Administration of Taxation.

(2)

In case the head office and the subordinate enterprises which share its management fees are not located in the same province (autonomous region, municipality directly under the Central Government) and if the amount of management fees, which the head office applies for withdrawing, is less than 20 million Yuan, the pre-tax deduction of management fees thereof shall be subject to the examination and approval of the provincial tax authorities of the place where the head office is located.

(3)

In case the head office and the subordinate enterprises which share its management fees are located in the same province (autonomous region, municipality directly under the Central Government), the pre-tax deduction of management fees shall be subject to the examination and approval of the provincial tax authorities of the place where the head office is located or of the organ authorized by the provincial tax authorities of the place where the head office is located.

4.

This Circular shall be go into effect as of the day when the examination and approval of the pre-tax deduction of head office management fees for the year of 2004 starts. The tax authorities that have received the applications of head offices for the year of 2004 shall transfer the application materials according to the power of examination and approval as specified in this Circular. If any previous provision is contrary to this Circular, this Circular shall prevail.

State Administration of Taxation

January 28, 2005