Cross-Border E-Commerce: Legal and Tax-related Risks

As an emerging foreign trade format, the cross-border e-commerce industry has achieved explosive development during the pandemic and has become an important force in China's export trade. However, since 2021, China's cross-border e-commerce sellers have begun to encounter "Ban Waves" and overseas intellectual property "hunting", with leading enterprises, promising upstarts, cross-border e-commerce listed companies and financing-level companies all being affected. Among the cross-border e-commerce IP disputes, the most commonly infringed rights are trademarks, copyrights and patent infringement. 

1) Trademark infringement

Trademark infringement has always been a "high-risk area" as intellectual property infringements occur frequently in cross-border e-commerce. Statistics from the General Administration of Customs of China show that in cross-border trade, products infringing trademark rights account for more than 95% of all infringing products. 

In practice, there are many kinds of trademark infringement done by enterprises, with the most common methods including:

• Registering a store name or website domain name consistent or similar to a trademark owner's trademark.

• Using a trademark that is identical or similar to the trademark owner in a product’s introduction.

• Selling products marked with the registered trademarks of others, selling counterfeit products, etc.

2) Patent infringement

In cross-border e-commerce activities, patent infringement mainly includes the following instances:

• Unauthorized counterfeiting and sale of the patentee's products.

• Offering to sell, selling, importing, or manufacturing products without the permission of the patent right holder.

• Manufacturing, selling, or promising to sell patented products, etc. using patent schemes without the permission of the right holder.

3) Copyright infringement

Copyright is usually infringed in the following ways:

• Using the right holder's pictures, promotional slogans, music, etc. for publicity without the permission of the copyright owner, a very typical way would be copying pictures.

• Acts of selling or disseminating works without the consent of the rights holder. For example, pirated books and pirated videos, etc. 

• Modifying the works of others without the consent of the right holder. For example, the infringer deliberately makes minor modifications to the art works and cartoon images in which the right holder enjoys copyright, forming a new "work" that is different from the original work but very alike, in order to expand the sales market by confusing consumers and taking advantage of the original work. 

In practice, the above-mentioned infringements will lead to serious consequences such as the removal of products, the closure of stores, the freezing of platform accounts, and a huge amount of penalties may be claimed by the right holder when a lawsuit is filed. 

Therefore, in the context of increasingly strengthening intellectual property protection at home and abroad, we recommend that cross-border e-commerce enterprises in China take active preventive and response measures, seek professional legal advice from the outset, and formulate targeted response strategies to prevent unreasonable and unnecessary intellectual property infringement complaints resulting in product removal, litigation or other sanctions that may bring significant economic losses to enterprises, as well as avoiding high litigation fees, lawyer fees or licensing fees caused by subsequent litigation, in order to build a favorable foundation for the healthy development of enterprises and even related industries. 

At present, the tax risks faced by cross-border e-commerce mainly involve declaration compliance and tax evasion.

1. Risk of Defrauding Export Tax Refund

The main means of tax fraud are as follows:

• The export price of genuine goods is overstated.

• Fake Less Than Container Load (LCL) for export without goods. The same batch of goods are declared by multiple customs in the name of multiple export enterprises and falsely reported as LCL. Customs generally adopt a random sampling method under non-special circumstances, while simultaneous LCL sampling is a small probability event.

• Tax fraudsters who have real export business but do not have the qualification of tax refund, sell export goods to export enterprises through "supply shell" with the qualification of general taxpayer and obtain the tax refund and share it in the way of self-export.

The crime of defrauding export tax refund comes with heavy criminal punishment.

2. Evasion of Corporate Income Tax Through Settlement of Foreign Exchange to Individual Accounts

An Enterprise Tax resident shall pay corporate income tax on its income from sources inside and outside of China. The corporate income tax rate is 25%. At present, in order to avoid a high tax burden, some cross-border e-commerce companies collect remittances to domestic individual accounts through third-party payment institutions to avoid corporate income tax. This practice is typical tax evasion and perpetrators will face great tax risks in the future.

3. Non-Compliant Declaration and Payment of Individual Income Tax

Individual income tax shall be paid for the income of individual tax residents from both inside and outside of China. The tax rate of comprehensive income such as wages and salaries range between 3% to 45%; the business income tax rate is from 5% to 35%; while the other income tax rate is levied at 20%. At present, many cross-border e-commerce enterprises directly transfer their income into their personal accounts, but their individual income has not been declared and taxed as required.

The cross-border e-commerce industry is of great strategic significance to China. The government gradually guides enterprises to continuously comply and reduce their tax burden under the condition of compliance on the basis of encouragement and support. Applying the customs clearance mode of 9610/9710/9810 is the first prerequisite for enjoying the policy of exemption from tax without tickets and verification of tax collection.

D'Andrea & Partners Legal Counsel and PHC Advisory Tax & Accounting (companies of DP Group) offer full-scale legal compliance, tax advisory support and consultancy to address any concerns related to this issue. If you are interested in cross-border e-commerce, feel free to contact