Starting A China Online Marketplace. No Don’t.

I alone must get some version of the following email (the below is a quick conglomeration of two that I received just this morning!) at least once a week, not to mention the other China lawyers in my firm:

My name is Norberto and I am from Spain. I have a question regarding China tax law because I am planning to start a company that will target the Chinese market.

We will be starting an online platform that targets learners and teachers in China. The platform will facilitate classes (language, math, etc.) between Chinese teachers and students and our company will take a fee for the intermediary services we provide. Students will pay our company and we keep a commission from that and remit the rest to the teacher.

What regulations apply to us paying these teachers? Will we be classified as paying “salaries” and therefore have tax liability or will all the tax responsibility be on the teachers themselves? Is there a minimum sum people can earn in China without our having to provide any information to the Chinese tax authorities?

Our plan is to have our company based outside of China initially, but then move into China once things start rolling.

My response (which I actually just now set as a one-click signature in my outlook account) is typically something like the following:

If China learns what you are doing (and it no doubt eventually will) its tax authorities will come after your company (and maybe you as well) for both company income taxes on the income you are generating from your doing business within China (probably around 25%) and for employer taxes and employer benefit payments on everyone you are using within China (probably around 40%), plus interest, plus penalties. Your company will also be at risk of being sued by the people it uses in China for various employment violations, including not having written employment contracts, not providing vacation time, etc.

My strongest advice for you if you do what you are planning to do is that you and anybody else identified with your company never go to China because the Chinese authorities like nothing more than to hold people until they pay all taxes, with interest and penalties. I suggest you read this article I wrote last year for Forbes Magazine, entitled, China’s Tax Authorities Want You, It details how China is really stepping up its efforts against companies that hire employees in China and/or do business in China without registering a company in China and paying their China taxes. Since I wrote this article (due in large part to its declining economy) China has only accelerated its efforts to track down and tax and penalize companies that do what you are proposing to do.

We will be discussing the practical aspects of Chinese law and how it impacts business there. We will be telling you what works and what does not and what you as a businessperson can do to use the law to your advantage. Our aim is to assist businesses already in China or planning to go into China, not to break new ground in legal theory or policy.