Cross-border hiring is usually discussed as a payroll problem. It is two problems. The first is who the lawful employer is, which determines whether the arrangement survives a labour dispute. The second is whether the company has acquired a taxable presence in the other jurisdiction, which determines whether it owes tax there for years it never noticed. The two are triggered by the same decision and are usually discovered at different times, the employment issue when someone leaves, the tax issue when a filing deadline passes.
The employing entity question
An overseas company with no registered presence in mainland China cannot lawfully employ a Chinese national directly. Chinese labour law requires a domestic employing entity; a foreign company without one cannot be the counterparty to a labour contract, cannot enrol the employee in social insurance, and cannot be the respondent in a labour arbitration in a way that produces a collectable award. The practical consequence is not that the arrangement is void, but that liability lands on whoever is reachable: the domestic affiliate that pays the salary, the founder who signed the offer letter, or the service provider that nominally employs the person.
Four structures are used in practice:
- A domestic entity. A wholly foreign-owned enterprise or a branch. Clean on employment, expensive on establishment, and the right answer once headcount in the market exceeds roughly ten.
- Employer of record (EOR). A licensed domestic HR provider becomes the nominal employer and seconds the employee to the client. It solves the social insurance and contract formalities quickly; it does not solve control, because the client still directs the work.
- Secondment from an affiliate. The employee stays on the payroll of the group entity that employs them and is seconded to another group company. This works when both entities are in the same group and the secondment agreement allocates cost and liability; it does not work when the receiving entity is unrelated.
- Contractor arrangements. Widely used and the most fragile. A person treated as a contractor but managed as an employee can claim an employment relationship, and Chinese arbitration practice looks at control, integration into the organisation, and continuity of remuneration rather than at the label.
EOR is lawful, but it is not a shell. The provider must hold a labour dispatch licence, and the arrangement is functionally close to dispatch, which caps the proportion of dispatched workers in a workforce and requires equal pay treatment. Where the client controls hours, output and discipline directly, a tribunal can look through the EOR to the client.
Work permits and social insurance
Foreign nationals working in China need a work permit and a residence permit; since the 2017 unification the two are processed through a single system with categories A, B and C by skill and salary. Hiring a foreign engineer without a permit exposes the company to fines and to the employee being treated as unlawfully employed, which affects their ability to enforce contractual claims.
For Chinese employees, social insurance and housing fund contributions are mandatory and are assessed on actual salary, not on the local minimum base. Companies that contribute on the minimum base to save cost create a liability that surfaces in two places: a labour dispute, where the employee claims the shortfall, and a financing diligence, where the lender or investor treats it as an unquantified exposure that must be reserved or indemnified.
Permanent establishment: the tax question nobody asks
A company becomes taxable in another jurisdiction either through a fixed place of business or through a dependent agent. Both are easier to create than founders expect.
Engineers sent abroad for an installation, a model deployment or a customer integration can create a service permanent establishment once their presence exceeds the threshold in the applicable tax treaty, commonly 183 days within any twelve-month period, sometimes shorter for specific project types. The clock is not per person; successive engineers on the same project can aggregate.
A local salesperson who habitually concludes contracts on the company’s behalf creates a dependent agent permanent establishment even without any office. The same is true of a local entity that is formally a distributor but in substance negotiates and binds the company.
Selling through an API or a SaaS platform is often assumed to be immune. It is not. Where the company installs software, provides on-site configuration, or maintains a local support team with authority to bind, the analysis moves toward a taxable presence. Where the product is genuinely self-service with no local personnel and no local contracting authority, the exposure is lower, but the conclusion depends on facts, not on the delivery model’s name.
Transfer pricing and revenue characterisation
Once there is a taxable presence, two further questions follow: at what price, and as what kind of income.
Intercompany charges for IP licensing, cost allocation for shared engineering, and intercompany loans must satisfy the arm’s length principle. Groups above the relevant thresholds prepare a master file, a local file and a country-by-country report. For AI companies the sensitive item is usually the licence fee for model weights or software: a low royalty shifts profit to the operating jurisdiction and is the first adjustment a tax authority will propose.
Revenue characterisation matters as much. If the customer obtains control of the technology, with rights to modify and sublicense, the transaction may be characterised as a technology transfer, which is exempt from VAT in China. If the customer merely receives a service outcome, it is a technical service taxed at six per cent. The distinction is decided on contract terms and on what the customer can actually do with the deliverable, and it is frequently the difference between a clean filing and an assessment.
The global minimum tax overlay
Groups with consolidated revenue above EUR 750 million fall within the OECD/G20 global minimum tax framework, with a 15 per cent floor. China has not legislated the rules into domestic law, but that does not insulate a Chinese-headquartered group: where a subsidiary or parent is located in a jurisdiction that has implemented the rules, including EU member states, top-up tax can be imposed there. Mid-sized AI companies are usually below the threshold, but the threshold is measured on consolidated group revenue, and a single large round that consolidates a newly acquired overseas subsidiary can change the analysis.
A six-item checklist
- Decide the employing entity before the first hire, not after the first dispute.
- If using an EOR, verify the dispatch licence and keep control of day-to-day management documented at arm’s length.
- Track days on site per project, not per person, against the treaty threshold.
- Do not let a local hire conclude contracts without a documented approval chain.
- Price intercompany licences with a contemporaneous benchmark, not after an inquiry letter.
- Characterise revenue in the contract, and make sure the deliverable matches the characterisation.
The cost of getting these right is a week of planning. The cost of getting them wrong is an assessment covering several prior years, plus a labour claim that arrives in the same quarter.