{"id":43756,"date":"2026-01-20T22:55:28","date_gmt":"2026-01-20T22:55:28","guid":{"rendered":"https:\/\/msadvisory.com\/?p=43756"},"modified":"2026-04-22T07:10:50","modified_gmt":"2026-04-22T07:10:50","slug":"tax-deductions-for-advertising-promotion-in-china","status":"publish","type":"post","link":"https:\/\/msadvisory.com\/tax-deductions-for-advertising-promotion-in-china\/","title":{"rendered":"Tax Deductions for Advertising &#038; Promotion in China: Rules Updated"},"content":{"rendered":"\t\t<div data-elementor-type=\"wp-post\" data-elementor-id=\"43756\" class=\"elementor elementor-43756\" data-elementor-post-type=\"post\">\n\t\t\t\t<div class=\"elementor-element elementor-element-06cce24 e-flex e-con-boxed e-con e-parent\" data-id=\"06cce24\" data-element_type=\"container\" data-e-type=\"container\">\n\t\t\t\t\t<div class=\"e-con-inner\">\n\t\t\t\t<div class=\"elementor-element elementor-element-913f429 elementor-widget elementor-widget-text-editor\" data-id=\"913f429\" data-element_type=\"widget\" data-e-type=\"widget\" data-widget_type=\"text-editor.default\">\n\t\t\t\t\t\t\t\t\t<p data-start=\"358\" data-end=\"733\">China has issued updated guidance clarifying how businesses may deduct <strong data-start=\"429\" data-end=\"473\">advertising and promotion (A&amp;P) expenses<\/strong> for <a href=\"https:\/\/msadvisory.com\/chinas-corporate-income-tax\/\">corporate income tax (CIT)<\/a> 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.<\/p>\n<p data-start=\"735\" data-end=\"1080\">For <a href=\"https:\/\/msadvisory.com\/china-foreign-invested-enterprise\/\">foreign-invested enterprises (FIEs)<\/a>, 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.<\/p>\n<p data-start=\"1082\" data-end=\"1386\">At MSA, we regularly see these issues arise not during incorporation, but <strong data-start=\"1156\" data-end=\"1184\">two to three years later<\/strong>, 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.<\/p>\n<h2 data-start=\"1393\" data-end=\"1452\">General Approach to Advertising and Promotion Deductions in China<\/h2>\n<p data-start=\"1454\" data-end=\"1778\">Unlike many jurisdictions that allow near-unlimited deductibility of business marketing expenses, China imposes <strong data-start=\"1566\" data-end=\"1584\">statutory caps<\/strong> on A&amp;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.<\/p>\n<p data-start=\"1780\" data-end=\"1851\">For foreign groups entering China, this is particularly relevant where:<\/p>\n<ul data-start=\"1853\" data-end=\"2082\">\n<li data-start=\"1853\" data-end=\"1919\">\n<p data-start=\"1855\" data-end=\"1919\">The China entity operates as a <strong data-start=\"1886\" data-end=\"1919\">sales or distribution company<\/strong><\/p>\n<\/li>\n<li data-start=\"1920\" data-end=\"1963\">\n<p data-start=\"1922\" data-end=\"1963\">Significant brand-building occurs locally<\/p>\n<\/li>\n<li data-start=\"1964\" data-end=\"2029\">\n<p data-start=\"1966\" data-end=\"2029\">Marketing activities are coordinated with overseas headquarters<\/p>\n<\/li>\n<li data-start=\"2030\" data-end=\"2082\">\n<p data-start=\"2032\" data-end=\"2082\">Intercompany service or royalty arrangements exist<\/p>\n<\/li>\n<\/ul>\n<p data-start=\"2084\" data-end=\"2253\">The updated rules reinforce the principle that <strong data-start=\"2131\" data-end=\"2213\">only genuine, reasonable, and China-related marketing expenses may be deducted<\/strong>, and only within prescribed thresholds.<\/p>\n<hr data-start=\"2255\" data-end=\"2258\">\n<h2 data-start=\"2260\" data-end=\"2302\">The general deduction cap: the 15% rule<\/h2>\n<p data-start=\"2304\" data-end=\"2618\">Under China\u2019s Corporate Income Tax framework, most enterprises may deduct advertising and promotion expenses up to <strong data-start=\"2419\" data-end=\"2450\">15% of annual sales revenue<\/strong>. Any excess above this threshold <strong data-start=\"2484\" data-end=\"2526\">cannot be deducted in the current year<\/strong>, but may be <strong data-start=\"2539\" data-end=\"2591\">carried forward and deducted in subsequent years<\/strong>, subject to future limits.<\/p>\n<p data-start=\"2620\" data-end=\"2680\">Key points often misunderstood by foreign companies include:<\/p>\n<ul data-start=\"2682\" data-end=\"2980\">\n<li data-start=\"2682\" data-end=\"2743\">\n<p data-start=\"2684\" data-end=\"2743\">The cap is calculated <strong data-start=\"2706\" data-end=\"2718\">annually<\/strong>, not over multiple years<\/p>\n<\/li>\n<li data-start=\"2744\" data-end=\"2824\">\n<p data-start=\"2746\" data-end=\"2824\">\u201cSales revenue\u201d refers to <strong data-start=\"2772\" data-end=\"2804\">recognised operating revenue<\/strong>, not gross receipts<\/p>\n<\/li>\n<li data-start=\"2825\" data-end=\"2906\">\n<p data-start=\"2827\" data-end=\"2906\">The carryforward is <strong data-start=\"2847\" data-end=\"2865\">not indefinite<\/strong> in practice if profitability remains low<\/p>\n<\/li>\n<li data-start=\"2907\" data-end=\"2980\">\n<p data-start=\"2909\" data-end=\"2980\">The burden of proof remains on the taxpayer to substantiate the expense<\/p>\n<\/li>\n<\/ul>\n<p data-start=\"2982\" data-end=\"3189\">The updated guidance confirms that tax authorities are paying closer attention to <strong data-start=\"3064\" data-end=\"3093\">year-on-year accumulation<\/strong> of non-deducted marketing costs, particularly where the China entity reports persistent losses.<\/p>\n<h2 data-start=\"3196\" data-end=\"3243\">Higher Deduction Cap for Specific Industries<\/h2>\n<p data-start=\"3245\" data-end=\"3428\">China continues to apply a <strong data-start=\"3272\" data-end=\"3307\">more generous 30% deduction cap<\/strong> for certain industries, reflecting their reliance on intensive marketing and brand development. These typically include:<\/p>\n<ul data-start=\"3430\" data-end=\"3534\">\n<li data-start=\"3430\" data-end=\"3441\">\n<p data-start=\"3432\" data-end=\"3441\">Cosmetics<\/p>\n<\/li>\n<li data-start=\"3442\" data-end=\"3459\">\n<p data-start=\"3444\" data-end=\"3459\">Pharmaceuticals<\/p>\n<\/li>\n<li data-start=\"3460\" data-end=\"3480\">\n<p data-start=\"3462\" data-end=\"3480\">Food and beverages<\/p>\n<\/li>\n<li data-start=\"3481\" data-end=\"3501\">\n<p data-start=\"3483\" data-end=\"3501\">Health supplements<\/p>\n<\/li>\n<li data-start=\"3502\" data-end=\"3534\">\n<p data-start=\"3504\" data-end=\"3534\">Certain consumer goods sectors<\/p>\n<\/li>\n<\/ul>\n<p data-start=\"3536\" data-end=\"3659\">However, the updated rules emphasise that <strong data-start=\"3578\" data-end=\"3629\">industry classification alone is not sufficient<\/strong>. Tax authorities may examine:<\/p>\n<ul data-start=\"3661\" data-end=\"3862\">\n<li data-start=\"3661\" data-end=\"3738\">\n<p data-start=\"3663\" data-end=\"3738\">Whether the company\u2019s <strong data-start=\"3685\" data-end=\"3706\">actual activities<\/strong> align with the claimed industry<\/p>\n<\/li>\n<li data-start=\"3739\" data-end=\"3805\">\n<p data-start=\"3741\" data-end=\"3805\">Whether promotion expenses are directly connected to China sales<\/p>\n<\/li>\n<li data-start=\"3806\" data-end=\"3862\">\n<p data-start=\"3808\" data-end=\"3862\">Whether costs are excessive relative to business scale<\/p>\n<\/li>\n<\/ul>\n<p data-start=\"3864\" data-end=\"4064\">This is particularly important for multinational groups that use <strong data-start=\"3929\" data-end=\"3954\">broad business scopes<\/strong> in their China business licence. Overly expansive scopes may weaken a company\u2019s position during a tax review.<\/p>\n<h2 data-start=\"4071\" data-end=\"4129\">What Qualifies as An \u201cAdvertising and Promotion\u201d Expense?<\/h2>\n<p data-start=\"4131\" data-end=\"4242\">One of the most important clarifications in the updated rules is the <strong data-start=\"4200\" data-end=\"4225\">functional definition<\/strong> of A&amp;P expenses.<\/p>\n<p data-start=\"4244\" data-end=\"4267\">Generally included are:<\/p>\n<ul data-start=\"4269\" data-end=\"4493\">\n<li data-start=\"4269\" data-end=\"4309\">\n<p data-start=\"4271\" data-end=\"4309\">Media advertising (online and offline)<\/p>\n<\/li>\n<li data-start=\"4310\" data-end=\"4348\">\n<p data-start=\"4312\" data-end=\"4348\">Brand campaigns and product launches<\/p>\n<\/li>\n<li data-start=\"4349\" data-end=\"4385\">\n<p data-start=\"4351\" data-end=\"4385\">Promotional events and exhibitions<\/p>\n<\/li>\n<li data-start=\"4386\" data-end=\"4427\">\n<p data-start=\"4388\" data-end=\"4427\">Consumer discounts and rebate campaigns<\/p>\n<\/li>\n<li data-start=\"4428\" data-end=\"4451\">\n<p data-start=\"4430\" data-end=\"4451\">Marketing agency fees<\/p>\n<\/li>\n<li data-start=\"4452\" data-end=\"4493\">\n<p data-start=\"4454\" data-end=\"4493\">Influencer and platform promotion costs<\/p>\n<\/li>\n<\/ul>\n<p data-start=\"4495\" data-end=\"4624\">However, tax authorities are increasingly challenging expenses that are <strong data-start=\"4567\" data-end=\"4584\">misclassified<\/strong> to fall within A&amp;P categories, such as:<\/p>\n<ul data-start=\"4626\" data-end=\"4828\">\n<li data-start=\"4626\" data-end=\"4673\">\n<p data-start=\"4628\" data-end=\"4673\">Sales commissions disguised as promotion fees<\/p>\n<\/li>\n<li data-start=\"4674\" data-end=\"4725\">\n<p data-start=\"4676\" data-end=\"4725\">Market research with limited promotional function<\/p>\n<\/li>\n<li data-start=\"4726\" data-end=\"4775\">\n<p data-start=\"4728\" data-end=\"4775\">Brand strategy work performed entirely overseas<\/p>\n<\/li>\n<li data-start=\"4776\" data-end=\"4828\">\n<p data-start=\"4778\" data-end=\"4828\">Group-level campaigns with minimal China relevance<\/p>\n<\/li>\n<\/ul>\n<p data-start=\"4830\" data-end=\"5019\">The guiding principle is <strong data-start=\"4855\" data-end=\"4903\">direct relevance to China revenue generation<\/strong>. Expenses that primarily benefit overseas brand owners or regional headquarters face a higher risk of disallowance.<\/p>\n<h2 data-start=\"5026\" data-end=\"5075\">Intercompany Charges and Overseas Brand owners<\/h2>\n<p data-start=\"5077\" data-end=\"5186\">For multinational groups, one of the most sensitive areas is <strong data-start=\"5138\" data-end=\"5185\">intercompany marketing and branding charges<\/strong>.<\/p>\n<p data-start=\"5188\" data-end=\"5218\">Common risk scenarios include:<\/p>\n<ul data-start=\"5220\" data-end=\"5466\">\n<li data-start=\"5220\" data-end=\"5293\">\n<p data-start=\"5222\" data-end=\"5293\">China subsidiaries paying overseas parents for \u201cglobal brand promotion\u201d<\/p>\n<\/li>\n<li data-start=\"5294\" data-end=\"5356\">\n<p data-start=\"5296\" data-end=\"5356\">Regional headquarters recharging marketing costs across Asia<\/p>\n<\/li>\n<li data-start=\"5357\" data-end=\"5405\">\n<p data-start=\"5359\" data-end=\"5405\">Royalties combined with promotion service fees<\/p>\n<\/li>\n<li data-start=\"5406\" data-end=\"5466\">\n<p data-start=\"5408\" data-end=\"5466\">Lump-sum management fees that include marketing components<\/p>\n<\/li>\n<\/ul>\n<p data-start=\"5468\" data-end=\"5570\">Under the updated enforcement approach, tax authorities increasingly require companies to demonstrate:<\/p>\n<ul data-start=\"5572\" data-end=\"5709\">\n<li data-start=\"5572\" data-end=\"5604\">\n<p data-start=\"5574\" data-end=\"5604\">Clear contractual arrangements<\/p>\n<\/li>\n<li data-start=\"5605\" data-end=\"5631\">\n<p data-start=\"5607\" data-end=\"5631\">Detailed cost breakdowns<\/p>\n<\/li>\n<li data-start=\"5632\" data-end=\"5670\">\n<p data-start=\"5634\" data-end=\"5670\">Evidence of actual services rendered<\/p>\n<\/li>\n<li data-start=\"5671\" data-end=\"5709\">\n<p data-start=\"5673\" data-end=\"5709\">Tangible benefit to the China entity<\/p>\n<\/li>\n<\/ul>\n<p data-start=\"5711\" data-end=\"5976\">If the China company is already paying <strong data-start=\"5750\" data-end=\"5781\">royalties for trademark use<\/strong>, tax authorities may question why additional brand promotion fees are necessary. In several audits, excessive A&amp;P deductions have been recharacterised as <strong data-start=\"5936\" data-end=\"5975\">non-deductible profit distributions<\/strong>.<\/p>\n<h2 data-start=\"5983\" data-end=\"6023\">2026 Reissue of Rules<\/h2>\n<p data-start=\"6025\" data-end=\"6174\"><a href=\"https:\/\/fgk.chinatax.gov.cn\/zcfgk\/c102416\/c5246328\/content.html\" target=\"_blank\" rel=\"noopener\">A new policy<\/a> has been implemented, applicable from 1 January 2026 to 31 December 2027. It essentially continues to the prior policy.&nbsp;<\/p>\n<p data-start=\"6176\" data-end=\"6216\">Companies should be prepared to provide:<\/p>\n<ul data-start=\"6218\" data-end=\"6423\">\n<li data-start=\"6218\" data-end=\"6248\">\n<p data-start=\"6220\" data-end=\"6248\">Invoices and payment records<\/p>\n<\/li>\n<li data-start=\"6249\" data-end=\"6289\">\n<p data-start=\"6251\" data-end=\"6289\">Marketing contracts and scopes of work<\/p>\n<\/li>\n<li data-start=\"6290\" data-end=\"6326\">\n<p data-start=\"6292\" data-end=\"6326\">Campaign materials and screenshots<\/p>\n<\/li>\n<li data-start=\"6327\" data-end=\"6370\">\n<p data-start=\"6329\" data-end=\"6370\">Evidence linking campaigns to China sales<\/p>\n<\/li>\n<li data-start=\"6371\" data-end=\"6423\">\n<p data-start=\"6373\" data-end=\"6423\">Allocation methodologies for shared regional costs<\/p>\n<\/li>\n<\/ul>\n<p data-start=\"6425\" data-end=\"6570\">In practice, companies that rely on generic descriptions such as \u201cmarketing support\u201d or \u201cbrand services\u201d are far more likely to face adjustments.<\/p>\n<p data-start=\"6572\" data-end=\"6732\">For foreign-invested enterprises still in early growth stages, this can come as a surprise\u2014especially when marketing spend was approved centrally outside China.<\/p>\n<h2 data-start=\"6739\" data-end=\"6797\">Strategic implications for company setup and operations<\/h2>\n<p data-start=\"6799\" data-end=\"6874\">These updated rules have practical consequences well beyond tax compliance.<\/p>\n<h3 data-start=\"6876\" data-end=\"6903\">1. Entity structuring<\/h3>\n<p data-start=\"6904\" data-end=\"7113\">Companies must consider whether the China entity is intended to be a <strong data-start=\"6973\" data-end=\"6996\">routine distributor<\/strong>, a <strong data-start=\"7000\" data-end=\"7017\">marketing hub<\/strong>, or a <strong data-start=\"7024\" data-end=\"7044\">principal entity<\/strong>. Each model supports different levels of deductible marketing spend.<\/p>\n<h3 data-start=\"7115\" data-end=\"7150\">2. Profitability expectations<\/h3>\n<p data-start=\"7151\" data-end=\"7316\">Persistent losses driven by high A&amp;P expenses will attract scrutiny. Authorities increasingly expect a <strong data-start=\"7254\" data-end=\"7279\">path to profitability<\/strong>, particularly for mature operations.<\/p>\n<h3 data-start=\"7318\" data-end=\"7353\">3. Transfer pricing alignment<\/h3>\n<p data-start=\"7354\" data-end=\"7514\">Marketing functions must align with the China entity\u2019s <a href=\"https:\/\/msadvisory.com\/resource\/transfer-pricing-china\/\">transfer pricing profile<\/a>. A \u201climited-risk distributor\u201d cannot credibly incur unlimited promotional costs.<\/p>\n<h3 data-start=\"7516\" data-end=\"7550\">4. Budgeting and forecasting<\/h3>\n<p data-start=\"7551\" data-end=\"7667\">Marketing budgets should be stress-tested against the deduction cap to avoid unexpected tax liabilities at year-end.<\/p>\n<h2 data-start=\"7674\" data-end=\"7724\">Practical Recommendations for Foreign Companies<\/h2>\n<p data-start=\"7726\" data-end=\"7809\">Based on recent audit trends, companies operating or incorporating in China should:<\/p>\n<ul data-start=\"7811\" data-end=\"8076\">\n<li data-start=\"7811\" data-end=\"7863\">\n<p data-start=\"7813\" data-end=\"7863\">Review marketing expense categories before booking<\/p>\n<\/li>\n<li data-start=\"7864\" data-end=\"7918\">\n<p data-start=\"7866\" data-end=\"7918\">Align intercompany agreements with actual activities<\/p>\n<\/li>\n<li data-start=\"7919\" data-end=\"7967\">\n<p data-start=\"7921\" data-end=\"7967\">Monitor cumulative non-deductible A&amp;P balances<\/p>\n<\/li>\n<li data-start=\"7968\" data-end=\"8024\">\n<p data-start=\"7970\" data-end=\"8024\">Avoid combining unrelated services into marketing fees<\/p>\n<\/li>\n<li data-start=\"8025\" data-end=\"8076\">\n<p data-start=\"8027\" data-end=\"8076\">Ensure business scope matches operational reality<\/p>\n<\/li>\n<\/ul>\n<p data-start=\"8078\" data-end=\"8196\">Importantly, these issues are far easier to manage <strong data-start=\"8129\" data-end=\"8169\">before incorporation or market entry<\/strong> than after problems arise.<\/p>\n<h2 data-start=\"8203\" data-end=\"8230\">MSA Supports Global Clients with China Tax and Deductions<\/h2>\n<p data-start=\"8232\" data-end=\"8400\">MSA works with international companies entering and expanding in China. Our support includes:<\/p>\n<ul data-start=\"8402\" data-end=\"8616\">\n<li data-start=\"8402\" data-end=\"8457\">\n<p data-start=\"8404\" data-end=\"8457\">China company incorporation and business scope design<\/p>\n<\/li>\n<li data-start=\"8458\" data-end=\"8499\">\n<p data-start=\"8460\" data-end=\"8499\">Operating model and functional analysis<\/p>\n<\/li>\n<li data-start=\"8500\" data-end=\"8557\">\n<p data-start=\"8502\" data-end=\"8557\">Coordination with tax advisors on cost allocation logic<\/p>\n<\/li>\n<li data-start=\"8558\" data-end=\"8616\">\n<p data-start=\"8560\" data-end=\"8616\">Early-stage compliance planning to avoid future disputes<\/p>\n<\/li>\n<\/ul>\n<p data-start=\"8618\" data-end=\"8795\">Advertising and promotion deductions are not merely a technical tax issue\u2014they are a <strong data-start=\"8703\" data-end=\"8723\">structural issue<\/strong> that affects profitability, transfer pricing, and long-term compliance.<\/p>\n<p data-start=\"8797\" data-end=\"8972\">For more information on how to manage deductions in China, <a href=\"https:\/\/msadvisory.com\/contact\/\">get in touch<\/a> with our China accounting experts.&nbsp;<\/p>\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t","protected":false},"excerpt":{"rendered":"<p>China has issued updated guidance clarifying how businesses may deduct advertising and promotion (A&amp;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 [&hellip;]<\/p>\n","protected":false},"author":11,"featured_media":37263,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"inline_featured_image":false,"_uf_show_specific_survey":0,"_uf_disable_surveys":false,"iawp_total_views":62,"footnotes":""},"categories":[360],"tags":[],"class_list":["post-43756","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-tax-de"],"acf":[],"_links":{"self":[{"href":"https:\/\/msadvisory.com\/wp-json\/wp\/v2\/posts\/43756","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/msadvisory.com\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/msadvisory.com\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/msadvisory.com\/wp-json\/wp\/v2\/users\/11"}],"replies":[{"embeddable":true,"href":"https:\/\/msadvisory.com\/wp-json\/wp\/v2\/comments?post=43756"}],"version-history":[{"count":8,"href":"https:\/\/msadvisory.com\/wp-json\/wp\/v2\/posts\/43756\/revisions"}],"predecessor-version":[{"id":47900,"href":"https:\/\/msadvisory.com\/wp-json\/wp\/v2\/posts\/43756\/revisions\/47900"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/msadvisory.com\/wp-json\/wp\/v2\/media\/37263"}],"wp:attachment":[{"href":"https:\/\/msadvisory.com\/wp-json\/wp\/v2\/media?parent=43756"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/msadvisory.com\/wp-json\/wp\/v2\/categories?post=43756"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/msadvisory.com\/wp-json\/wp\/v2\/tags?post=43756"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}