China has issued updated guidance clarifying how businesses may deduct advertising and promotion (A&P) expenses for corporate income tax (CIT) purposes. While the basic framework has existed for years, the revised rules and enforcement trends significantly affect how multinational groups structure marketing spend, intercompany arrangements, and China profit allocation.

For foreign-invested enterprises (FIEs), especially those in consumer-facing, technology, pharmaceutical, and platform-driven sectors, advertising and promotion costs are often substantial. Misunderstanding the deduction limits or documentation standards can result in denied deductions, increased taxable income, and exposure during tax audits.

At MSA, we regularly see these issues arise not during incorporation, but two to three years later, when tax authorities begin scrutinising accumulated losses or persistent low profitability. Understanding the updated rules early allows companies to design compliant operating models from the outset.

General Approach to Advertising and Promotion Deductions in China

Unlike many jurisdictions that allow near-unlimited deductibility of business marketing expenses, China imposes statutory caps on A&P deductions for most companies. These limits are designed to prevent excessive profit shifting through inflated marketing charges and to align deductions with domestic economic substance.

For foreign groups entering China, this is particularly relevant where:

• The China entity operates as a sales or distribution company

• Significant brand-building occurs locally

• Marketing activities are coordinated with overseas headquarters

• Intercompany service or royalty arrangements exist

The updated rules reinforce the principle that only genuine, reasonable, and China-related marketing expenses may be deducted, and only within prescribed thresholds.

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The general deduction cap: the 15% rule

Under China’s Corporate Income Tax framework, most enterprises may deduct advertising and promotion expenses up to 15% of annual sales revenue. Any excess above this threshold cannot be deducted in the current year, but may be carried forward and deducted in subsequent years, subject to future limits.

Key points often misunderstood by foreign companies include:

• The cap is calculated annually, not over multiple years

• “Sales revenue” refers to recognised operating revenue, not gross receipts

• The carryforward is not indefinite in practice if profitability remains low

• The burden of proof remains on the taxpayer to substantiate the expense

The updated guidance confirms that tax authorities are paying closer attention to year-on-year accumulation of non-deducted marketing costs, particularly where the China entity reports persistent losses.

Higher Deduction Cap for Specific Industries

China continues to apply a more generous 30% deduction cap for certain industries, reflecting their reliance on intensive marketing and brand development. These typically include:

• Cosmetics

• Pharmaceuticals

• Food and beverages

• Health supplements

• Certain consumer goods sectors

However, the updated rules emphasise that industry classification alone is not sufficient. Tax authorities may examine:

• Whether the company’s actual activities align with the claimed industry

• Whether promotion expenses are directly connected to China sales

• Whether costs are excessive relative to business scale

This is particularly important for multinational groups that use broad business scopes in their China business licence. Overly expansive scopes may weaken a company’s position during a tax review.

What Qualifies as An “Advertising and Promotion” Expense?

One of the most important clarifications in the updated rules is the functional definition of A&P expenses.

Generally included are:

• Media advertising (online and offline)

• Brand campaigns and product launches

• Promotional events and exhibitions

• Consumer discounts and rebate campaigns

• Marketing agency fees

• Influencer and platform promotion costs

However, tax authorities are increasingly challenging expenses that are misclassified to fall within A&P categories, such as:

• Sales commissions disguised as promotion fees

• Market research with limited promotional function

• Brand strategy work performed entirely overseas

• Group-level campaigns with minimal China relevance

The guiding principle is direct relevance to China revenue generation. Expenses that primarily benefit overseas brand owners or regional headquarters face a higher risk of disallowance.

Intercompany Charges and Overseas Brand owners

For multinational groups, one of the most sensitive areas is intercompany marketing and branding charges.

Common risk scenarios include:

• China subsidiaries paying overseas parents for “global brand promotion”

• Regional headquarters recharging marketing costs across Asia

• Royalties combined with promotion service fees

• Lump-sum management fees that include marketing components

Under the updated enforcement approach, tax authorities increasingly require companies to demonstrate:

• Clear contractual arrangements

• Detailed cost breakdowns

• Evidence of actual services rendered

• Tangible benefit to the China entity

If the China company is already paying royalties for trademark use, tax authorities may question why additional brand promotion fees are necessary. In several audits, excessive A&P deductions have been recharacterised as non-deductible profit distributions.

2026 Reissue of Rules

A new policy has been implemented, applicable from 1 January 2026 to 31 December 2027. It essentially continues to the prior policy. 

Companies should be prepared to provide:

• Invoices and payment records

• Marketing contracts and scopes of work

• Campaign materials and screenshots

• Evidence linking campaigns to China sales

• Allocation methodologies for shared regional costs

In practice, companies that rely on generic descriptions such as “marketing support” or “brand services” are far more likely to face adjustments.

For foreign-invested enterprises still in early growth stages, this can come as a surprise—especially when marketing spend was approved centrally outside China.

Strategic implications for company setup and operations

These updated rules have practical consequences well beyond tax compliance.

1. Entity structuring

Companies must consider whether the China entity is intended to be a routine distributor, a marketing hub, or a principal entity. Each model supports different levels of deductible marketing spend.

2. Profitability expectations

Persistent losses driven by high A&P expenses will attract scrutiny. Authorities increasingly expect a path to profitability, particularly for mature operations.

3. Transfer pricing alignment

Marketing functions must align with the China entity’s transfer pricing profile. A “limited-risk distributor” cannot credibly incur unlimited promotional costs.

4. Budgeting and forecasting

Marketing budgets should be stress-tested against the deduction cap to avoid unexpected tax liabilities at year-end.

Practical Recommendations for Foreign Companies

Based on recent audit trends, companies operating or incorporating in China should:

• Review marketing expense categories before booking

• Align intercompany agreements with actual activities

• Monitor cumulative non-deductible A&P balances

• Avoid combining unrelated services into marketing fees

• Ensure business scope matches operational reality

Importantly, these issues are far easier to manage before incorporation or market entry than after problems arise.

MSA Supports Global Clients with China Tax and Deductions

MSA works with international companies entering and expanding in China. Our support includes:

• China company incorporation and business scope design

• Operating model and functional analysis

• Coordination with tax advisors on cost allocation logic

• Early-stage compliance planning to avoid future disputes

Advertising and promotion deductions are not merely a technical tax issue—they are a structural issue that affects profitability, transfer pricing, and long-term compliance.

For more information on how to manage deductions in China, get in touch with our China accounting experts.