Friday, 9 December 2011

First thin capitalization audit case settled in Shaanxi, China

According to China Tax News, a newspaper sponsored by China’s State Administration of Taxation (“SAT”), the Shaanxi Provincial State Tax Bureau (“SXSTB”) has concluded China’s first thin capitalization audit case. Besides thin capitalization, the case also involves an investigation of tangible goods transactions and equity transfer. During the process, the SAT was also involved to provide advice and support to the local in-charge tax authorities.
China’s thin capitalization rules state that taxpayers cannot deduct interest expenses for debt which exceeds certain threshold related party debt-to-equity ratios, unless either (i) the two parties are both domestic companies where the tax burden of the borrower is not higher than that of the lender, or (ii) the taxpayer can demonstrate and document that the loan and debt-to-equity ratio comply with the arm’s length principle.
More info: PKN