Is it safe to earn and spend income entirely overseas?
With the development of economic globalization, starting businesses, studying, and traveling around the world are no longer uncommon. It has become normal for individuals to earn income and make expenditures overseas. This is particularly true in the Web3 industry, where many projects relocate overseas due to domestic policy considerations. This raises a question: Is it necessary to declare taxes in China?
Many people assume that if they earn and spend their income overseas, there is no need to file tax returns in China. However, the reality is that overseas expenditures can also attract the attention of tax authorities, and you may receive SMS reminders from "China Taxation." For instance, you might be reminded that your overseas expenditure exceeds the income declared for individual income tax purposes, and you may be required to provide a self-inspection report.
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Additionally, during the annual settlement period for individual income tax, some individuals investing in crypto assets have sequentially received gentle reminders from the tax bureau. These SMS messages remind taxpayers to truthfully declare income obtained from overseas sources; otherwise, they will face tax-related risks, including the payment of back taxes and late fees.
After these messages were disclosed within the Web3 community, they attracted widespread attention from Web3 entrepreneurs expanding overseas. How should Web3 entrepreneurs expanding overseas handle tax payments? How can potential tax risks be avoided? In this article, Lawyer Zheng Yuan interprets the definition of overseas income for Web3 entrepreneurs, analyzes how tax authorities obtain information on concealed overseas income, explains the consequences that overseas entrepreneurs may face for failing to declare and pay taxes in a timely manner, and proposes corresponding response suggestions and risk prevention measures.
Interpretation of Overseas Income for Web3 Practitioners
According to the "Announcement of the Ministry of Finance and the State Administration of Taxation on Policies Concerning Individual Income Tax on Overseas Income" (Announcement No. 3 of 2020 by the Ministry of Finance and the State Administration of Taxation), "I. The following income shall be considered as income derived from sources outside China:
(1) Income derived from providing labor services outside China due to employment, engagement, or performance of contracts;
(2) Remuneration for manuscripts paid and borne by enterprises and other organizations outside China;
(3) Income derived from licensing various franchise rights for use outside China;
(4) Income related to production and business activities derived from engaging in production and business activities outside China;
(5) Interest, dividends, and bonus income derived from enterprises outside China, other organizations, and non-resident individuals;
(6) Income derived from leasing property to lessees for use outside China;
(7) Income derived from transferring real estate outside China, transferring stocks, equity, and other equity interests (hereinafter referred to as "equity interests") formed by investing in enterprises and other organizations outside China, or transferring other property outside China. However, regarding the transfer of equity interests formed by investing in enterprises and other organizations outside China, if at any time during the three years (36 consecutive calendar months) prior to the transfer of such equity interests, more than 50% of the fair value of the assets of the invested enterprise or other organization directly or indirectly originates from real estate located within China, the income derived shall be considered as income derived from sources within China;
(8) Incidental income paid and borne by enterprises outside China, other organizations, and non-resident individuals;
(9) Where the Ministry of Finance and the State Administration of Taxation have other provisions, such provisions shall apply.
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For Web3 practitioners, major sources of overseas income, in addition to participating in cryptocurrency trading, content creation and monetization, NFT digital collectible trading, and decentralized finance, include profits from company or project startups, such as developing and operating decentralized applications. These may fall under the definitions of (1) income derived from providing labor services while employed outside China; and (2) income related to production and business activities derived from engaging in production and business activities outside China.
Regarding tax declaration, Web3 entrepreneurs may refer to the following example: Zhang San starts a Web3 company in Hong Kong, primarily developing and operating decentralized applications, and pays himself a salary. If Zhang San is a Chinese resident taxpayer, he must comply with the provisions of the Individual Income Tax Law of the People's Republic of China. Regarding applicable tax rates, wage and salary income is included in comprehensive income, subject to a maximum tax rate of 45%. If Zhang San also distributes dividends to himself, as a Chinese resident taxpayer, he should pay individual income tax on dividends at a rate of 20%. It is worth noting that this situation applies to Chinese resident taxpayers. For details on determination and applicable tax rates, please refer to the article previously published by Mankun Law Firm, "How Should Chinese Resident Taxpayers Pay Taxes on Earnings from Starting Businesses in Hong Kong? | Mankun Web3 Legal Education."
How Do Tax Authorities Obtain Information on Overseas Income?
Many Web3 entrepreneurs are curious: How do tax authorities discover my overseas income and overseas expenditures? On one hand, in the era of big data, tax authorities in mainland China can obtain relevant data by strengthening data sharing with other departments. On the other hand, as international cooperation on the exchange of tax information continues to strengthen, the ability of various countries to obtain data on individuals' overseas income is constantly improving. Under the global trend towards information transparency, tax authorities currently have many channels to obtain information on taxpayers' overseas income.
1. International Tax Treaties and Exchange of Information
Tax treaties signed between China and other countries or regions usually contain clauses on the exchange of information, allowing for the mutual exchange of taxpayers' cross-border income information while adhering to confidentiality principles. Wang Jun, Director of the State Administration of Taxation of China, signed the "Multilateral Convention on Mutual Administrative Assistance in Tax Matters" on behalf of the Chinese government in Paris, France, making China the 56th signatory to the convention. This represents a solid step forward in strengthening international tax cooperation, expanding the international tax collection network, and improving the level of tax administration and services for cross-border taxpayers. Against the backdrop of this global exchange of tax information, it is not surprising that high-net-worth individuals with overseas income receive messages from the tax bureau prompting them to pay taxes.
2. Automatic Exchange of Financial Account Tax Information (CRS)
China began implementing the Common Reporting Standard (CRS) in 2018. This is an international tax information exchange mechanism established globally to improve tax transparency and combat tax evasion. Through CRS, Chinese tax authorities can automatically obtain account information of domestic resident taxpayers held in overseas financial institutions. If a domestic resident taxpayer has significant balances or extensive expenditure records in overseas accounts but has not declared taxes domestically, it is perfectly normal for them to be flagged by the tax bureau and receive relevant notifications.
3. Reporting by Multinational Corporations and Financial Institutions
Tax authorities require multinational corporations and financial institutions to report information on cross-border transactions, using these reports to analyze potential overseas income.
4. Third-Party Data and Information ReportingTax authorities utilize data from third parties such as real estate registration, vehicle management, customs, and commerce departments for cross-verification to uncover undeclared overseas income.
5. Voluntary Disclosure and Whistleblowing MechanismsTax authorities also encourage taxpayers to voluntarily disclose undeclared overseas income and provide certain protections to individuals who report tax evasion behaviors.
Through the aforementioned methods, tax authorities can effectively discover and obtain information on taxpayers' concealed overseas income, thereby taking corresponding tax administration measures.
What Are the Potential Consequences of Failing to Pay Taxes in a Timely Manner?
For Chinese resident taxpayers, failing to declare and pay individual income tax in a timely manner may lead to serious consequences. These consequences are not limited to financial penalties but also involve issues such as credit records and legal risks. Ignoring these compliance requirements will not only cause direct financial losses but also have a profound impact on an individual's long-term interests. Listed below are some of the potential consequences of failing to pay individual income tax for taxpayers' reference.
1. Fines and Late Fees
According to the relevant provisions of the Law on the Administration of Tax Collection, failure to file tax returns and submit tax materials within the prescribed time limit may result in a fine ofup to RMB 2,000; in serious cases, a fine ofbetween RMB 2,000 and RMB 10,000may be imposed. In addition to ordering payment within a specified time limit, the tax authority shall impose a late fee of0.05% per dayon the overdue tax amount, calculated from the date the tax became overdue.
2. Decrease in Credit Rating
Failure to file tax returns and submit financial statements and tax materials within the prescribed time limit will result in a deduction of 5 points per occurrence. These deductions will affect the final assessment of the tax credit rating.
3. Classification as an Abnormal Household
According to the relevant provisions of the "Measures for the Administration of Tax Registration," if a taxpayer's whereabouts cannot be ascertained, they may be classified as an abnormal household. This status will be recorded in the taxpayer's file, and the tax authority will suspend the use of their tax registration certificate, invoice purchase book, and invoices.
Legal Compliance Recommendations
Against the backdrop of tax system reform, the proportion of individual income tax in China's total tax revenue has been rising in recent years. Tax authorities are continuously deepening international tax cooperation and improving the Common Reporting Standard to combat cross-border tax avoidance and prevent the loss of national tax revenue. The following are several recommendations for taxpayers' reference:
1. Strengthen Study of the Latest Fiscal and Tax Policies
Fiscal and tax regulations and policies are constantly changing. Taxpayers, in particular, need to promptly pay attention to the latest tax policies and regulations, understand and utilize international tax preference policies, and effectively reduce the tax burden costs of cross-border business.
2. Declare and Pay Taxes Truthfully
Taxpayers should regularly review their financial status to ensure consistency with the information held by tax authorities, avoiding corresponding tax risks arising from discrepancies or failure to declare taxes. Both domestic and overseas income should be declared truthfully, and taxes should be paid accordingly, avoiding tax evasion through false declarations or concealment of income.
Of course, for non-professionals, keeping up with the ever-updating fiscal and tax policies can be overwhelming, and tax risks are difficult to avoid. In such cases, it is necessary to seek assistance from professionals. Lawyer Zheng Yuan will continue to focus on issues related to Web3 tax compliance and optimization, providing advice and assistance on tax compliance, tax risk response, tax optimization, and other related matters, including but not limited to the following:
1. Domestic and Overseas Tax Consultation and Optimization
Understanding clients' financial status and tax needs, providing domestic and cross-border tax consultation services, helping enterprises understand and comply with Web3-related tax regulations, ensuring corporate tax compliance both domestically and internationally, and fully utilizing domestic and international tax preference policies to reasonably reduce the tax burden.
2. Tax Declaration and Planning
Calculating declaration amounts for the tax categories declared by clients, completing tax declarations and payments in a timely manner, and providing proof of tax payment. Customized optimized solutions will be provided based on the specific circumstances of Web3 clients' tax declarations.
3. Tax Risk Assessment and Response
Conducting comprehensive risk screenings of taxpayers' identity status, asset status, and historical tax matters. Based on the specific circumstances of the risks, formulating overall communication and resolution strategies, actively communicating with competent authorities, and resolving historical issues under controlled risk conditions.
This article does not constitute legal, accounting, or tax advisory opinions. Readers should understand and use this article based on appropriate professional opinions issued by qualified professionals.
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*This article is an original work of Mankun Law Firm and represents only the personal views of the author. It does not constitute legal consultation or legal advice on specific matters. For reprinting or legal consultation, please add customer service contact: MankunLawFirm.
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