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3. TAXATION IN THE MAINLAND CHINA
3.4 THIN CAPITALIZATION RULES
These are the rules set up to govern the related party loans and control the ratio of debt -to -equity subject to foreign investment enterprise ("FIE") in order to maintain the reasonable deductibility of loan interest and the availability of sufficient capital funds from those foreign investors.
Article 46 of new CIT law mentions that interest expenses related to the related party loans do not meet the stipulated debt-to-equity ratio are not deductible; The criteria of arm-length debts is applicable.
Accordingly, careful tax planning idea should be made in this regard to make sure that the interest expense incurred in respect of the related party loan can be fully deductible and thus the risk of the possibility of the tax adjustment raised by the PRC Tax Bureau can be minimized.
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