China is tightening its crackdown on tax evasion by online streamers and influencers, following a string of cases in which individuals disguised personal earnings as business income to lower their tax bills.
Chinese tax authorities take the position that income should be classified based on whether a business is actually being operated, not on whether it is registered. Simply setting up a company, in other words, does not make personal earnings count as business income.
Streamer Earned 1.8 Billion Won, Underpaid 400 Million Won in Tax, Then Lost in Court
A recently disclosed ruling by the Siming District People's Court in Xiamen reaffirmed that substance takes precedence over form when classifying a streamer's income, the Chinese business outlet Economic Observer reported on the 26th.
The case involved a streamer surnamed Yao, who broadcast on an online platform from 2019 to 2021.
Yao received a total of 16.7 million yuan from the platform and a management agency during that period. After excluding 7.5 million yuan in transactions generated by another person through fraudulent orders, actual service income was calculated at about 9.18 million yuan (about 1.826 billion won).
Yao, however, did not include the money in a comprehensive personal income filing. An investigation found more than 2.36 million yuan in unpaid personal income tax.
Chinese tax authorities ruled in March 2023 that Yao's conduct amounted to tax evasion and imposed a fine of about 2.36 million yuan, equal to the unpaid tax.
Yao filed an administrative lawsuit arguing there had been no intent to avoid taxes, but the court disagreed. It held that intent can be established even if a taxpayer does not know the exact amount of tax underpaid, as long as the taxpayer was aware of the obligation to report income and failed to do so.
Yao's argument was rejected. Neither side appealed the first-instance ruling, which became final.
Business Registration Alone Is Not Enough — Income Classification Is the Key
The central question in the case was how money earned from online broadcasting should be classified.
China's personal income tax law distinguishes between service income, which an individual receives for independently providing labor or services, and business income, which comes from actually operating a business.
Different rates apply to the two. Service income is folded into comprehensive income and taxed at progressive rates of 3% to 45%. Business income is taxed at progressive rates of 5% to 35%, and expenses incurred in running the business can be deducted.
That means the tax owed on identical earnings can differ depending on how the income is characterized. Some streamers have exploited the gap by setting up sole proprietorships or single-owner enterprises and then reporting as business income what they had previously earned in their own names.
Chinese authorities, however, hold that holding a business license is not by itself grounds for treating such earnings as business income.
Under the legal interpretation outlined by Economic Observer, the standards for determining the nature of income fall broadly into formal and substantive tests.
The formal test looks at matters such as whether a business is registered and who the contracting parties are. The substantive test asks whether independent business activity actually took place. Key factors include whether operations are continuous, whether staff are employed, whether operating expenses are paid and whether there are working relationships with other businesses.
Signing contracts in a company's name or issuing tax invoices, in short, is not enough to qualify earnings as business income.
No Office, No Staff, but Business Income Filed — Chinese Tax Authorities Step Up Enforcement
The same taxation principle was applied in another streamer tax evasion case.
When Chinese tax authorities uncovered the tax evasion case of streamer Xu Jingwan in July, they focused their investigation on whether actual business activity had taken place.
Xu set up a single-owner enterprise and then reported advertising revenue as business income. The investigation, however, turned up little evidence of normal business operations at the company.
There were no office rent payments and no records of water or electricity bills. No employees enrolled in social insurance and no actual commercial transactions were confirmed.
Tax authorities concluded that the company had not operated independently but was a sham set up to change the character of personal income and reduce the tax burden.
The Chinese government is also spelling out how to classify the income of workers operating on online platforms. Under rules issued by the State Taxation Administration in June last year, payments for services provided through platforms — including online broadcasting, education, medical services, delivery, household services, advertising and translation — are in principle treated as service income.
Revenue generated through independent business operations such as selling goods or transportation, by contrast, can be classified as business income when actual management activity is confirmed.
Authorities say they are not trying to restrict the establishment of businesses as such, but to stop the practice of using nominal business entities, without substantive management activity, to cut taxes.
As economic activity on online platforms expands rapidly, China's taxation standards are also growing stricter. The tax system is shifting toward verifying how income was actually generated and who bears responsibility for running a business, rather than outward conditions such as business registration or contracts.