What must I do to stay in compliance with China's new three-tier documentation framework?

Q&A

In 2016, China introduced a three-tiered contemporaneous documentation framework (set out in Circular 42) that replaced previous documentation rules. Under the new regulations, entities with related party transactions above certain thresholds must prepare the contemporaneous documentation (master files, local files, or special files) in line with corresponding requirements and before the stipulated deadlines.

Master files must be prepared within 12 months of the fiscal year end of the group’s ultimate holding company if:

  • Cross-border related party transactions have been conducted in the tax year concerned, and your enterprise group to which the ultimate holding company belongs, has prepared a master file; or
  • Your Chinese entity's annual total amount of related party transactions exceeds RMB 1 billion.

Local files must be prepared before June 30 of the year following the related party transaction (RPT) if:

  • RPTs for transfer of tangible assets exceed RMB 200 million;
  • RPTs for transfer of financial assets exceed RMB 100 million;
  • RPTs for transfer of intangible assets exceed RMB 100 million;
  • RPTs for other related transactions exceed RMB 40 million; or
  • Single function companies that incurred a loss. 

Special files must be prepared before June 30 of the year following the related party transaction (RPT) if:

  • Your Chinese entity has entered into a cost sharing arrangement with related parties; or
  • Your Chinese entity's debt to equity ratio exceeds the standard ratio and you need to illustrate its conformity with arm's length principle.


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