Recently, a tax penalty notice has been trending in both the finance and taxation circles and the cross-border e-commerce community. This case is worth careful study by every seller currently using the “Hong Kong company for payment collection + mainland company for operations” model.

A mainland company received a remittance of 11.94 million from a Hong Kong company but failed to report it, and was ultimatelyRecovery of Taxes and Imposition of FinesA total of approximately660,000 yuan!

Many sellers“ first reaction upon seeing this news was panic, followed by confusion: ‘I receive payments through my Hong Kong company and then transfer the funds to my mainland company under the guise of ”operating expenses’—isn’t this standard industry practice? How did this become tax evasion?”

Today, Qicaiying will use this real-life case to provide an in-depth analysis: Under the current strict regulatory environment of “data-driven tax administration,” how exactly should cross-border e-commerce businesses ensure financial and tax compliance? Is your so-called “compliance structure” actually saving you money—or is it setting you up for trouble?

这66万罚款到底是怎么算出来的？

Let’s first review the full story behind this case. This case is very typical and covers nearly all of the most common financial and tax pitfalls currently faced by small and medium-sized cross-border e-commerce sellers.

business model

From its establishment in 2015 through the end of 2024, the domestic company involved in the case continuously received U.S. dollar remittances from a Hong Kong-based company, with a cumulative exchange amount totaling 11.943 million RMB.

This Hong Kong-based company is primarily engaged in the export of insulated cups, but all international trade-related support functions—such as procurement and order tracking—are handled by the mainland-based company. The actual person in charge of both companies is Liu.

资金流转

Every month, the Hong Kong company transfers funds to the mainland company under the guise of “office expenses.” After converting the foreign currency, the mainland company does not maintain proper accounting records or file tax returns; instead, it transfers a portion of the funds directly into the personal accounts of former employees and uses bank accounts, Alipay, WeChat, and other methods to pay employee salaries and fees to the actual person in charge.

税务认定

Although the employees of the domestic company had only signed employment contracts with the domestic company, and there was no formal service agreement between the two companies, the tax authorities, based on an assessment of personnel, funds, and actual business operations, determined that the domestic company had, in substance, provided business support services to the Hong Kong company, and that the related payments constituted taxable service revenue.

Penalty results

Ultimately, the company was found to have underpaid approximately 676,000 yuan in value-added tax. It was also found to have issues related to the urban maintenance and construction tax, corporate income tax, withholding and remittance of individual income tax, and the management of accounting books and vouchers, and was fined approximately 660,000 yuan.

Qicaiying Commentary:In this case, the most serious issue isn't the failure to pay taxes, but rather“A serious disconnect between business operations and tax filings”
. The boss thought that as long as the money came from Hong Kong, it was considered overseas income; he thought he could get away with it by not signing contracts and paying salaries through off-the-books accounts. But the depth of a tax audit far exceeds your imagination. The audit covered the past 10 years and not only examined VAT but also followed the trail to investigate corporate income tax and personal income tax—not even overlooking issues with the management of accounting books and supporting documents.

跨境卖家必须打破3大税务误区

This case involving 11.94 million has exposed significant gaps in many sellers’ understanding of finance and taxation. If you hold any of the following three beliefs, stop immediately—the risks are already looming.

Misconception 1: Money transferred from Hong Kong is considered foreign income and is automatically exempt from cross-border taxes.

The Truth: Tax-exemption status is determined not by the payer’s place of registration, but by the actual location where the service is provided.

Many cross-border sellers have a misconception: as long as the contracting party, payment account, or entity receiving payments for the online store is located in Hong Kong, income earned within mainland China is considered “foreign income” and is therefore exempt from value-added tax.

However, tax determinations are not based solely on the payer’s place of registration; they also depend onDetermine where the service actually takes place, who performs it, and whether the service is directly related to goods within the country.

Under the VAT policies governing cross-border taxable transactions, certain services provided to overseas entities may qualify for tax exemption; however, this typically requires that the services be consumed entirely overseas. For business support services, if the scope of work directly involves the procurement, inspection, or shipping arrangements of domestic goods, such services may be deemed to have a direct connection to domestic goods and thus fail to meet the condition of being “consumed entirely overseas.”

In this case, the personnel are located within the country, the employment relationship is within the country, and the procurement coordination, inspection, and booking of shipping space are also primarily related to goods within the country. Therefore, even if the service recipient is a Hong Kong company and the fees are paid in U.S. dollars, tax exemption cannot be granted solely on the basis of an “overseas contract combined with an overseas remittance.”

Similarly, the absence of a contract does not render income non-taxable. Tax authorities can use evidence such as employment contracts, payroll records, and bank statements to determine what services the company actually provided and the source of the income.

Misconception #2: As long as you register a Hong Kong company and draw up a “control agreement,” you’ve established a compliant structure.

The Truth: A structure with no commercial substance is merely “paper compliance” that serves only to deceive oneself and others.

There are many so-called “structural compliance” solutions on the market that, in reality, merely involve adding layers to a Hong Kong company’s structure, modifying capital notes, or retroactively signing agreements—these are typical examples of compliance on paper.

For example, although the agreement states that the Hong Kong company controls the mainland store entity, the Hong Kong company has no staff, office space, or actual decision-making authority, nor does it hold ownership of the goods or bear inventory risk; the goods, stores, advertising, pricing, logistics, and funding remain under the control of the mainland team. In this case, a mere “control agreement” is unlikely to alter the substance of the business.

If a Hong Kong company is structured to serve as the actual purchaser and seller, it should, in principle, possess business functions commensurate with that role, including: making independent purchasing and sales decisions; acquiring and controlling goods; assuming inventory and pricing risks; managing overseas warehouses and platform sales; and collecting sales revenue and maintaining independent accounting records.

If these requirements are not met, a Hong Kong company will merely serve as a “payment channel” and may even be deemed a “permanent establishment,” exposing it to the risk of double taxation.

Misconception #3: If you just make the books look a little better and backdate a few contracts, you’ll be able to get by with the tax authorities.

The Truth: Under a multi-entity operational model, data discrepancies have nowhere to hide.

Affiliated companies must also determine transaction prices (transfer pricing) based on their respective functions, risks, and the assets they use. These requirements mean that companies must continuously bear the costs associated with corporate secretarial services, auditing, tax filing, and bank account maintenance for their Hong Kong entities, as well as the costs related to exports, foreign exchange receipts, value-added tax, corporate income tax, related-party transactions, and transfer pricing management for their mainland entities.

The more parties involved, the more points of reconciliation are required between contract flows, goods flows, cash flows, invoice flows, and platform data. For general sellers with limited scale and profit margins, the long-term maintenance costs of this type of structure may exceed the actual benefits.

At the same time, overseas platforms, banks, and tax compliance authorities are tightening their verification requirements regarding KYC, beneficial owners, actual account controllers, transaction backgrounds, and sources of funds. Simply “making the contracts look good” domestically, without being able to explain the data from overseas platforms, bank statements, and actual business operations, can actually lead to conflicting evidence.

什么才是真正的合规？

In the face of an increasingly stringent regulatory environment, cross-border sellers must clearly recognize that compliance is not a cost, but rather the cornerstone of a business’s long-term survival.

If a company truly needs to retain its Hong Kong entity as an overseas entity, it must ensure that the entity remains “active” and has genuine business substance.

A true compliance framework must meet the following conditions:

• Feature Matching:Hong Kong companies must have independent decision-making authority over procurement and sales, rather than serving as “puppets” of mainland companies.
• Risk Assumption:Hong Kong companies must bear inventory risks such as slow-moving goods and price fluctuations, rather than simply earning a fixed “handling fee.”
• Asset Control:A Hong Kong company must own or control the relevant intangible assets (such as trademarks and patents) and bear the corresponding management expenses.
• Separate Accounting:Transactions between Hong Kong companies and mainland China companies must comply with the arm’s-length principle, and transfer pricing documentation must be prepared and made available for audit.

But the reality is that, for the vast majority of small and medium-sized sellers, the cost of maintaining a Hong Kong company with “all the bells and whistles” is extremely high. You’ll need to hire a Hong Kong secretarial firm, an auditor, and a tax accountant, and you’ll also have to navigate dual compliance requirements both domestically and internationally. If there’s a misstep at any stage, you could face back taxes and fines, just as in the case mentioned above.

境内主体 + 0110一般贸易出口

更简单、更透明、更合规的路径

Given that multi-tiered offshore structures involve high maintenance costs and significant risks, is there a simpler, more transparent, and more compliant path for the vast majority of cross-border e-commerce sellers?

The answer is: Yes. That means returning to the essence of the business and following the compliant path of “domestic entity + 0110 general trade exports.”

为什么推荐“0110”模式？

0110, which refers to the “General Trade” regulatory mode.For cross-border e-commerce sellers, if your goods are exported in bulk to overseas fulfillment centers (such as Amazon FBA) via traditional container shipping or air freight, and you have complete special VAT invoices, then the 0110 model is the most established and reliable compliant channel.

The core logic is as follows: A domestic company purchases goods in its own name (obtaining input invoices) → formally clears customs for export via the 0110 procedure → ships the goods to an overseas warehouse or delivers them directly to overseas customers → proceeds from overseas sales are repatriated to the domestic company in compliance with regulations → the domestic company recognizes revenue, files tax returns, and applies for export tax rebates in accordance with the law.

Key Advantages of the 0110 Model

Say Goodbye to the Risks of “Payment-Only Exports” Once and for All:In the past, many sellers were accustomed to using the “buy-and-export” method, which prevented them from receiving foreign exchange or claiming tax refunds, forcing them to route funds through underground money transfer services or Hong Kong-based companies. The 0110 model creates a complete chain of evidence—comprising customs declarations, bills of lading, contracts, invoices, and foreign exchange receipt slips—that can withstand joint audits by tax and customs authorities.

Legally Recovering Profits:Eligible procurement expenses may qualify for export tax rebates in accordance with regulations. These tax rebates directly increase a company’s net profit, making them a more practical and safer option than so-called “tax planning.”

Strengthening and Expanding Domestic Entities:Retaining profits and revenue in domestic companies in compliance with regulations helps businesses build credit, facilitates future financing and loans, simplifies the process of applying for government subsidies, and even lays the groundwork for future capitalization initiatives.

Clear relationships, low explanation costs:The entity operating the platform store, the entity handling export customs clearance, the entity receiving payments, and the entity liable for taxes must all be the same. Tax authorities want to see a genuine, complete business cycle—not a bunch of unexplained “office expenses” and transactions in personal bank accounts.

企财盈能帮你做什么？

As a service provider specializing in financial and tax compliance for cross-border e-commerce, Qicaiying fully understands the challenges faced by sellers. We don’t design structures that are merely theoretical; we provide practical, actionable financial and tax solutions.

In response to the current challenging tax audit environment, Qi Cai Ying offers the following core services:

1,跨境架构合规诊断

We’ll help you analyze your existing Hong Kong and mainland China corporate structures, identify potential tax risks, and provide a detailed diagnostic report and optimization recommendations—so you’ll know exactly whether your current structure is “secure.”

2,0110出口退税全流程服务

From qualification registration, customs declaration form preparation, and management of input invoices to tax refund applications, we offer one-stop agency services. This allows you not only to collect payment for your goods in compliance with regulations within China but also to legally claim export tax refunds, thereby increasing your company’s profits.

3,转让定价文档编制

If your business does need to retain a Hong Kong company, we can assist you in preparing transfer pricing documentation that complies with tax laws, help you navigate tax audits related to related-party transactions, and demonstrate the reasonableness of your pricing.

4,Hong Kong Company Audit

We offer comprehensive managed services for Hong Kong company secretarial work, tax filing, and auditing, ensuring your Hong Kong company maintains genuine business substance and avoids the risks associated with being a “shell company.”

5,Financial and Tax Compliance

Professional bookkeeping, tax filing, and annual tax settlement services ensure that your entity’s financial records are clear and compliant.

put at the end

When it comes to tax compliance in cross-border e-commerce, the days when simply “registering a Hong Kong company” meant you could rest easy are long gone.

This case demonstrates that tax audits are becoming increasingly rigorous—with retroactive reviews spanning 10 years, scrutiny of related-party structures, and a focus on substance over form. In recent years, the State Taxation Administration has repeatedly emphasized the need for targeted regulation of high-risk industries and key sectors. As a new form of foreign trade, cross-border e-commerce, while benefiting from policy incentives, will inevitably face stricter regulatory requirements.

Dear sellers, please stop relying on the “unorthodox methods” of the past to deal with today’s “new regulations.”

Instead of living in constant fear that the tax authorities might come knocking one day, why not take the initiative now to streamline your business structure and embrace compliance? Make running your business simple again and ensure your profits are safely in your pocket.

If you have concerns about your current Hong Kong company structure, or if you’d like to learn about the specific procedures for export tax rebates under the 0110 general trade category,Feel free to contact Qicaiying for a free one-on-one assessment.