The answer first
When a Hong Kong company trades with a related company, such as a parent, subsidiary or sister company, the price must reflect what independent parties would agree: the arm's length principle. Hong Kong has a statutory transfer pricing regime, with documentation requirements that apply to larger groups and larger transactions.
The arm's length principle applies regardless of size, and the Inland Revenue Department can adjust profits that do not meet it. Where documentation is required, it must be prepared within 9 months after the end of the accounting period and kept for at least 7 years.
At a glance
- Applies to
- All related-party transactions
- Documentation
- Master file and local file, unless exempt
- Deadline
- Within 9 months after the end of the accounting period
- Keep for
- At least 7 years
Who must prepare documentation
| Exemption | Threshold |
|---|---|
| Business size | Exempt if the entity meets any two of: total revenue not more than HK$400 million; total assets not more than HK$300 million; not more than 100 employees |
| Transfers of property (other than financial assets and intangibles) | Below HK$220 million |
| Transfers of financial assets | Below HK$110 million |
| Transfers of intangibles | Below HK$110 million |
| Other transactions (for example, services, royalties) | Below HK$44 million |
Large groups with consolidated revenue at or above the threshold must also consider country-by-country reporting.
Common related-party transactions
- Sales and purchases of goods between group companies.
- Management, IT, marketing or other service charges.
- Loans and guarantees between companies.
- Royalties for brands, technology or other intellectual property.
- Cost-sharing arrangements.
Key takeawayEven when documentation is not required, keep a short written explanation of how each related-party price was set. It answers most questions from auditors and the Inland Revenue Department.
Practical steps
- List all related-party transactions and their annual values.
- Check whether the business-size or transaction exemptions apply.
- Put written intercompany agreements in place.
- Document how prices are set and benchmarked.
- Review annually and when the business changes.
Penalty exposureFailure to prepare required documentation can lead to prosecution and fines. Transfer pricing adjustments can result in additional tax and penalties. Specialist advice is needed for documentation and benchmarking.
Self-check: where do you stand?
| Question | What to do |
|---|---|
| Do you have transactions with related companies? | List them and their values |
| Do you meet the business-size exemption? | Check revenue, assets and employees |
| Are there written intercompany agreements? | If not, put them in place |
| Can you explain how each price was set? | If not, document the method |
| Is documentation due within 9 months of year end? | Diarise and engage specialists |
How DBMS Global can help
- Mapping related-party transactions from your accounts.
- Intercompany agreements and records, with specialists where needed.
- Reflecting transfer pricing positions in your tax returns.
In summary
- Arm's length applies to all related-party dealings.
- Documentation is required unless exempt.
- Keep written agreements and explanations.
Official references
- Inland Revenue Ordinance (Cap. 112), Part 8AA and Schedule 17D
- Inland Revenue Department: transfer pricing documentation, www.ird.gov.hk