First of all, it is necessary to clarify what an affiliated enterprise is.
According to the provisions of the Enterprise Income Tax Law of the People's Republic of China and its implementing regulations, an affiliated enterprise refers to an enterprise that has one of the following relationships:
There is a direct or indirect ownership or control relationship in terms of capital, operation, purchase and sale, etc.;
Directly or indirectly owned or controlled by a third party;
Other relationships that are related in interest.
Tax treatment of related party transactions
Transfer pricing methodology: Transactions between affiliated enterprises** should comply with the arm's length principle and avoid tax avoidance through transfer pricing. The tax authorities may conduct transfer pricing investigations and adjustments by means of comparable uncontrolled** methods, resale** methods, cost-plus methods, transactional net profit methods, and profit split methods.
Advance pricing arrangementsAffiliated enterprises can apply to the tax authorities for an advance pricing arrangement to agree on the pricing principles and calculation methods for related party transactions in future years, so as to reduce tax disputes.
Thin capitalization managementThe ratio of debt investment to equity investment between affiliated enterprises should comply with the provisions of the tax law to avoid tax avoidance through thin capitalization.
Controlled Foreign Business Management: Affiliated enterprises located abroad directly or indirectly controlled by Chinese resident enterprises, if the actual tax burden is less than 125% or no actual business activities, the profit shall be included in the current income of the resident enterprise.
Related Business Transaction ReportAffiliated enterprises shall regularly submit to the tax authorities the report form of related party transactions, including information such as the type, amount, and pricing principle of related party transactions.
Tax Inspections and PenaltiesThe tax authorities have the right to conduct tax inspections on the related party transactions of affiliated enterprises, and will impose penalties in accordance with the law if any violations of laws and regulations are found.
Transactions between affiliated enterprises shall be treated in accordance with the arm's length principle. The arm's length principle refers to the principle that parties to a transaction that are not related to each other should conduct business in accordance with arm's length dealings** and business practices.
Illustrate. Suppose that Company A and Company B are affiliated enterprises, and Company A sells goods to Company B, and the sales amount is 1 million yuan. After investigation by the tax authorities, it was found that the ** was significantly higher than the market ** and did not comply with the arm's length principle. The tax authorities used the comparable uncontrolled** method to make adjustments and determined that the market ** for the commodity was 800,000 yuan. Therefore, Company A needs to pay 200,000 yuan of enterprise income tax.