A company in Shanghai was fined a total of CNY 6.43 million for setting up a shell company in Hong Kong to receive payments from overseas clients!

Company A, a logistics service provider in Shanghai with over a decade of experience in international business, primarily serves clients in Southeast Asia. In early 2014, following tax planning advice from a financial consulting firm, Company A established a shell company in Hong Kong. After opening a bank account, the company used this Hong Kong shell entity to receive payments from some overseas clients, allowing it to "save" over CNY 3 million in taxes over the years.

In 2024, the Shanghai Tax Bureau, leveraging big data analysis from the Golden Tax Phase IV system, noticed that while Company A's business volume and expenses grew significantly year by year, its business revenue did not correspondingly increase. Upon further investigation, the tax bureau discovered that some overseas clients had not paid logistics fees directly to Company A but instead to its Hong Kong shell company. With the assistance of the Hong Kong tax authorities, the bureau verified that Company A had concealed CNY 17.4 million in business revenue through the Hong Kong shell company. As a result, Company A was required to pay back taxes of CNY 3.21 million for tax evasion from January 2014 to March 2021, and was fined an additional CNY 3.21 million for underpayment of taxes. The total amount of back taxes and fines amounted to CNY 6.43 million. Ultimately, Company A suffered significant losses, not only financially but also in terms of its business credibility, leading to the loss of many overseas clients.

Dongjin Reminder:

The practice of Chinese companies concealing business revenue through offshore shell companies has been placed under strict scrutiny by tax authorities. The Chinese tax bureau is increasingly utilizing tax supervision systems to analyze business operation data. Once anomalies are detected, the bureau will proactively investigate and seek assistance from foreign tax authorities. Such practices to conceal business revenue are becoming increasingly difficult to hide. Relevant companies are advised to take note and make necessary adjustments.

If companies have any questions, feel free to consult Dongjin at any time.

Mike Chang

Partner

mikechang@shanghaiinvest.com