"She Turned Her Life Around by Dancing in a Parking Lot..." An Absurd Tax Dodge Brought a "1.2 Billion Won Shock"

A "Shell Company" with No Office or Employees
A Tax Dodge by an Influencer with 6 Million Followers

Chinese Court Reaffirms "Substance Over Form" Taxation in Ruling Against Livestreamer
Top Tax Rate: 45% on Remuneration Income, 35% on Busines

Chinese livestreamers' tax-saving formula of setting up a company to reduce their tax bills is coming under scrutiny. Chinese tax authorities and courts are assessing income for tax purposes based on actual business activities rather than whether a business is formally registered.

According to Chinese financial newspaper Economic Observer on October 26, the Siming District People's Court in Xiamen, Fujian Province, reaffirmed the principle that "income should be assessed based on substance rather than form" in a recently released ruling on a livestreamer's tax evasion case.

Chinese influencer Yuan Wan (real name Xu Jingwan) dancing in an underground parking lot in 2018. Yuan Wan, who rose to fame through the video, was recently found to have evaded taxes and ordered to pay approximately 1.257 billion won in taxes, surcharges, and fines. Screenshot from the video.

A 10-percentage-point tax rate gap... Reporting service income as business income

The central issue is how a streamer's income should be classified. China's Individual Income Tax Law distinguishes between "remuneration income," which individuals receive for independently providing labor or services, and "business income," which they earn by actually operating a business. Remuneration income is subject to progressive tax rates of 3% to 45%, while business income is taxed at 5% to 35%, with a top rate 10 percentage points lower. Business operators can also deduct operating expenses. As a result, some streamers have set up sole proprietorships or one-person companies and reported remuneration income as business income.

The streamer in this case, identified by the surname Yao, livestreamed under his own name from 2019 to 2021 and received 16.7 million yuan (approximately 3.322 billion won) from platforms and management companies. Of that amount, 7.5 million yuan (approximately 1.492 billion won) was found to be inflated transaction value generated by a third party through fake orders and was excluded from his income. The tax authorities recognized approximately 9.18 million yuan (approximately 1.826 billion won) as actual remuneration income. Yao failed to report this income and underpaid more than 2.36 million yuan (approximately 469 million won) in personal income tax. In March 2023, the tax authorities ruled that this constituted tax evasion and imposed a fine equal to the amount of tax evaded.

Yao filed an administrative lawsuit, arguing that he had not intended to evade taxes, but the court rejected his claim. The court stated, "Even if a taxpayer does not know the exact amount of tax evaded, intent may be recognized if the taxpayer knew of the obligation to report income and violated it." Neither party appealed, and the first-instance ruling became final.

Influencer with 6 million followers also caught... The test is whether an actual business exists

Cases involving this method are being uncovered one after another. This year, tax authorities disclosed tax evasion by influencers with more than 1 million followers, including Xu Jingwan, Chen Xu, and Bai Bing. Xu Jingwan, who has more than 6 million followers, underpaid 3.1345 million yuan (approximately 623 million won) in personal income tax and value-added tax, among other taxes, from 2021 to 2023. The tax authorities assessed a total of 6.3196 million yuan (approximately 1.257 billion won) in back taxes, surcharges, and fines.

Platform data provided the clue that led to the discovery. Using big data analysis, the tax authorities found that Xu Jingwan's reported personal income tax was extremely low compared with the prices and sales volumes of the products she sold, and that two linked online stores had reported zero tax since their establishment. Xu Jingwan had set up a one-person company and reported advertising revenue as business income, but had no expenses for office rent, water, or electricity, and had neither employees enrolled in social insurance nor any actual business transactions.

Photo for illustrative purposes. Pexels

In regulations issued last June, the State Taxation Administration classified income earned through platforms by providing services such as livestreaming, education, medical care, delivery, housekeeping, advertising, and translation and interpretation as remuneration income in principle. Revenue from actual business activities, such as selling or transporting goods, was classified as business income. Economic Observer reported, "In addition to formalities such as business registration and the contracting party, authorities also consider whether the person operates a business independently, hires employees or incurs operating expenses, and earns income in cooperation with others." It added, "Simply signing contracts or issuing tax invoices in a business's name is not enough for income to be recognized as business income."

Professor Siyanwu of the School of Finance and Taxation at Zhejiang University of Finance and Economics stressed, "Whether taxpayers followed an institution's advice or were given incorrect guidance, reporting their income truthfully and paying taxes are legal obligations. Not knowing the policy or receiving incorrect guidance from an institution cannot serve as grounds for exemption from liability."

This content was produced with the assistance of AI translation services.