Original Article: Tax Risks of "Fake Self-Operation with Genuine Agency" Under the New Policies

Editor's Note

In the article Legal Consequences of Non-compliant Document Filing and Recordation Under the New Export Tax Refund (Exemption) Rules, we analyzed issues related to document filing and recordation in conjunction with the new regulations. This article traces the origin of the provisions governing "fake self-operation with genuine agency" by referencing the judicial interpretation on tax-related crimes issued by the Supreme People's Court and the Supreme People's Procuratorate (hereinafter referred to as the "Two Highs"), the Implementation Regulations of the Value-Added Tax Law, and the enterprise income tax (EIT) filing rules. It further analyzes the impacts of the new regulations on this practice for readers' reference.

I. Historical Origin of "Fake Self-Operation with Genuine Agency"

Before the reform and opening up, China implemented a highly centralized and unified foreign trade system, where the state integrated the operation and administration of foreign trade under a management model of unified responsibility for profits and losses. At that time, export business was almost exclusively conducted by national-level foreign trade corporations, and a stable and systematic export tax refund policy system had not yet been formed.

Between 1978 and 1994, under the guidance of the reform and opening up policy, China carried out major reforms to the original foreign trade system. On the one hand, the state gradually decentralized foreign trade operation rights and explicitly granted self-operated import and export qualifications to some manufacturing enterprises. Overall, however, foreign trade operation rights remained a scarce resource under strict examination and approval administration. On the other hand, to encourage the development of export trade, the state formally introduced a tax refund policy for exported products effective April 1985, marking the official establishment of China's import and export taxation system.

Against this backdrop, due to the examination and approval system for foreign trade operation rights, a large number of enterprises without such rights were unable to directly carry out export business. A small number of export enterprises with foreign trade operation rights, taking advantage of their qualification advantages, leased or lent out their foreign trade operation rights in a disguised form. They failed to fulfill their examination and verification obligations for the authenticity of export business, providing opportunities for lawbreakers to commit illegal acts such as false export, document forgery, and defrauding export tax refunds. This resulted in severe losses of state tax revenue, and triggered a series of cases including the "4·20" export tax fraud case in Xianning, Hubei Province.

In response to the above issues, the State Taxation Administration and the Ministry of Foreign Trade and Economic Cooperation (now renamed the Ministry of Commerce) jointly issued the Notice on Refusing Tax Refunds for Products Exported by Export Enterprises in the "Four Selfs and Three No-Sees" Mode (Guo Shui Fa [1992] No. 156). In light of the illegal operation models in practice, the document formally defined the specific connotation of the illegal act of "four selfs and three no-sees": export enterprises, in violation of normal foreign trade operation procedures, conduct transactions where the "clients" or intermediaries bring their own customers, their own supply of goods, their own bank drafts, and handle customs declaration by themselves, while the export enterprises do not see the exported products, do not see the goods suppliers, and do not see the foreign merchants. Meanwhile, it explicitly stipulated that no tax refund shall be granted for such transactions whatsoever.

In 1994, the Foreign Trade Law came into force, formally establishing the examination and approval system for foreign trade operation rights. This system further solidified the scarcity of foreign trade operation rights, which remained concentrated in a small number of specialized foreign trade enterprises, leaving many manufacturing enterprises unable to directly engage in import and export business. To carry out export business, flexible models such as operation through right borrowing, affiliated operation, and bill purchasing export under the "four selfs and three no-sees" mode became prevalent in practice, which became a major inducement for export tax fraud.

To effectively curb the risk of export tax fraud and standardize the order of export trade, the state has continuously issued a number of regulatory documents since 1997 to strengthen the supervision of export tax refunds. The Supplementary Notice of the Ministry of Finance and the State Taxation Administration on Several Tax Issues Concerning Exported Goods (Cai Shui Zi [1997] No. 14, already invalidated) clarified that no tax refund shall be granted for goods exported through affiliation or right borrowing. The Notice of the State Taxation Administration and the Ministry of Foreign Trade and Economic Cooperation on Standardizing Export Trade and Tax Refund Procedures to Prevent and Crack Down on Export Tax Fraud (Guo Shui Fa [1998] No. 84) and the Notice of the State Taxation Administration on Further Strengthening Tax Administration of Exported Goods to Strictly Prevent Tax Fraud Cases (Guo Shui Fa [1999] No. 228) imposed a strict ban on bill purchasing business under the "four selfs and three no-sees" mode, and may suspend the tax refund right of non-compliant enterprises for more than six months. The Notice of the Ministry of Foreign Trade and Economic Cooperation and the State Taxation Administration on Reiterating the Standardization of Operation Behaviors of Import and Export Enterprises and Prohibiting Various Forms of Operation Through Right Borrowing and Affiliated Operation (Wai Jing Mao Fa Zhan Fa [2000] No. 450), the Notice of the Ministry of Foreign Trade and Economic Cooperation and the State Taxation Administration on Issuing the Interim Provisions on Administrative Penalties for Enterprises Committing Export Tax Fraud (Wai Jing Mao Fa Zhan Fa [2000] No. 513), and the Notice of the Ministry of Foreign Trade and Economic Cooperation and the State Taxation Administration on Further Strengthening Tax and Trade Cooperation to Adhere to the "Two-Pronged Approach" of Cracking Down on Export Tax Fraud and Accelerating the Progress of Export Tax Refunds (Wai Jing Mao Ji Cai Fa [2001] No. 356) repeatedly reaffirmed the ban on illegal acts such as operation through right borrowing, affiliated operation, and bill purchasing export under the "four selfs and three no-sees" mode, to strengthen regulatory deterrence.

In addition, in the criminal law field, the Supreme People's Court issued the judicial interpretation on export tax fraud (Fa Shi [2002] No. 30, already invalidated), which included the act of enterprises with foreign trade operation rights allowing others to defraud export tax refunds through the "four selfs and three no-sees" mode into the scope of criminal punishment for the crime of defrauding export tax refunds, increasing the penalties for tax fraud violations.

In 2004, the revised Foreign Trade Law came into force, changing the foreign trade operation right from an examination and approval system to a filing and registration system. All types of market entities can engage in import and export business after completing filing in accordance with the law. This reform narrowed the living space for enterprises to adopt bill purchasing export, operation through right borrowing, and affiliated export under the "four selfs and three no-sees" mode. However, some enterprises still continued to use the above illegal models in practice.

In response to this issue, in 2006, the State Taxation Administration and the Ministry of Commerce summarized past experience and issued the Notice of the State Taxation Administration and the Ministry of Commerce on Further Standardizing the Order of Foreign Trade Export Operation and Effectively Strengthening the Administration of Export Goods Tax Refund (Exemption) (Guo Shui Fa [2006] No. 24). Building on the illegal export acts such as the "four selfs and three no-sees" mode, the document systematically listed and regulated the long-standing practice in which enterprises conduct export business in the name of self-operation, while the business is essentially controlled by others, with the nominal enterprise bearing no risks and not substantially participating in the operation. It explicitly stipulated that export tax refund (exemption) shall not be granted for such businesses. Since then, the illegal export model of "fake self-operation with genuine agency" has been clearly defined and regulated in an institutionalized and standardized manner.

II. What Changes Have Taken Place in "Fake Self-Operation with Genuine Agency" Under the New Regulations?

(I) Only Minor Changes Have Occurred in the Manifestations of "Fake Self-Operation with Genuine Agency"

In 2012, the Ministry of Finance and the State Taxation Administration systematically sorted out and integrated the relevant tax policies on exported goods and services, and issued the Notice of the Ministry of Finance and the State Taxation Administration on Value-Added Tax and Consumption Tax Policies for Exported Goods and Services (Cai Shui [2012] No. 39, already invalidated), which incorporated the relevant provisions of Guo Shui Fa [2006] No. 24.

In January 2026, the Ministry of Finance and the State Taxation Administration issued the Announcement of the Ministry of Finance and the State Taxation Administration on Value-Added Tax and Consumption Tax Policies for Export Business (Announcement No. 11 [2026] of the Ministry of Finance and the State Taxation Administration). The announcement basically carried over the original provisions on "fake self-operation with genuine agency", with only two minor adjustments, which are aligned with and adapted to the actual situation in practice where the verification form for export proceeds has been abolished and customs clearance operations have been electronicized.

(II) Other Provisions on "Fake Self-Operation with Genuine Agency" and Their Impacts

1. The Two Highs' Judicial Interpretation on Tax-Related Crimes Deleted the Laissez-Faire Clause of "Four Selfs and Three No-Sees", and the Determination of Tax Fraud Returns to the Accomplice Theory

In response to new developments and changes in practice, the Supreme People's Court and the Supreme People's Procuratorate issued the judicial interpretation on tax-related crimes in 2024. Article 7 of the interpretation reshaped the objective elements of the crime of defrauding export tax refunds, and deleted the special provision on the "four selfs and three no-sees" mode in Article 6 of Fa Shi [2002] No. 30.

In the past, in judicial practice, for export enterprises involved in export tax fraud cases due to operation in the "four selfs and three no-sees" mode, judicial authorities often presumed that the enterprise had the subjective intent of allowing others to commit tax fraud based on objective factors such as the length of time the enterprise had been engaged in the foreign trade industry and whether it should have known that the "four selfs and three no-sees" mode is an illegal operation model. They rejected the defense arguments raised by the export enterprises that they were deceived by others and had no subjective intent to commit tax fraud, resulting in improper liability being imposed on some export enterprises with only negligence.

Now, while deleting the "four selfs and three no-sees" clause, the Two Highs' judicial interpretation on tax-related crimes added a new accomplice clause in Article 19: "Whoever, while clearly knowing that another person commits a crime endangering tax collection and administration, still provides an account, credit certificate or other assistance for such person shall be punished as an accomplice of the corresponding crime."

This means that whether an export enterprise conducting export business through the illegal "fake self-operation with genuine agency" mode constitutes the crime of defrauding export tax refunds shall be determined and analyzed based on the accomplice theory. Specifically, from the objective aspect, it is necessary to determine whether the export enterprise has committed acts assisting tax fraud such as falsely issuing invoices, facilitating fund backflow, and forging customs declaration forms; from the subjective aspect, it is necessary to determine whether the export enterprise clearly knows that the actual export party is committing tax fraud. In other words, if an export enterprise only adopts the illegal business model of "fake self-operation with genuine agency", it does not necessarily constitute the crime of defrauding export tax refunds.

2. Provisions on Enterprise Income Tax Filing Administration Clarify the EIT Taxable Subject

In July 2025, the State Taxation Administration issued the Announcement on Optimizing the Matters Related to Enterprise Income Tax Prepayment Filing (Announcement No. 17 [2025] of the State Taxation Administration). Article 6 of the announcement stipulates: "Where a production and sales enterprise exports goods, it shall calculate, declare and pay enterprise income tax in accordance with the law on the income obtained from the export of such goods. Among them, an enterprise that exports goods through self-operation shall declare the income corresponding to the export of goods produced and sold by the enterprise itself; an enterprise that exports goods through entrustment shall declare the income corresponding to the export of goods produced by the enterprise itself through entrusted export."

Article 7 stipulates: "An enterprise that exports goods as an agent, including through market procurement trade, foreign trade comprehensive services and other agency methods, shall simultaneously submit the basic information of the actual entrusting export party and the export amount when filing the prepaid tax return (Annex 2). If an enterprise fails to accurately submit the basic information of the actual entrusting export party and the export amount, the export business shall be deemed as self-operation, and the enterprise shall be liable for the enterprise income tax payable on the corresponding export amount. The actual entrusting export party refers to the actual production and sales entity of the exported goods."

This means that under normal circumstances, the entrusting export party is the enterprise income tax taxpayer for the income from exported goods, and the agency export party only fulfills the tax payment obligation for the agency income it obtains. Under exceptional circumstances, if the agency export party fails to submit the relevant export information of the entrusting party in accordance with the provisions, it shall bear the enterprise income tax payment obligation corresponding to the income from exported goods.

In the past, in practice, for export enterprises conducting business through the "fake self-operation with genuine agency" mode, some tax authorities adopted verified collection of enterprise income tax from the nominal export enterprise because it could not provide cost vouchers, while other tax authorities determined that the nominal export enterprise was not the taxpayer in accordance with the substance over form principle and refused to levy enterprise income tax on it. Under the new regulations, the tax compliance requirements for nominal export enterprises are clearer. If a nominal export enterprise fails to truthfully fill in the information of the actual entrusting export party, it will be directly deemed to adopt the self-operated export model and is required to declare and pay enterprise income tax corresponding to the export income in accordance with the provisions on self-operated export. The controversial handling modes in past practice will be unified and standardized.

3. Implementation Regulations of the Value-Added Tax Law Strengthen the Entrustment Agency Liability

On January 1, 2026, the Implementation Regulations of the Value-Added Tax Law officially came into force. Paragraph 2 of Article 48 stipulates: "Where a taxpayer exports goods by means of entrustment, it shall go through the entrustment agency export formalities in accordance with the provisions of the competent tax department of the State Council, and the entrusting party shall apply for export tax refund (exemption), VAT exemption or VAT payment in accordance with the provisions; where the entrustment agency export formalities are not completed, the consignor of the exported goods shall declare and pay VAT in accordance with the provisions."

This means that the entrusting enterprise can enjoy the export tax refund (exemption) policy after completing the entrustment formalities in accordance with the provisions. If the formalities are not completed, the consignor shall declare and pay VAT, resulting in the legal consequence of deemed domestic sale. This further blocks the living space of the "fake self-operation with genuine agency" mode at the administrative regulation level.

In essence, "fake self-operation with genuine agency" is an illegal operation model that covers up the essence of entrusted export with the appearance of self-operation and fails to go through the entrustment agency export formalities in accordance with the law. Under the new regulations, if the entrustment agency export formalities are not performed in accordance with the rules and the nominal export enterprise is the consignor, the corresponding exported goods shall be directly subject to the VAT taxation policy, strengthening the regulation and liability tracing for illegal export models.

III. Conclusion

The new regulations present "precision-oriented and full-chain" characteristics in the regulation of "fake self-operation with genuine agency". They not only clarify the boundary between violations and crimes, but also strengthen the compliance responsibilities of enterprises.

For enterprises conducting business through the "fake self-operation with genuine agency" mode, the already refunded (exempted) tax shall be recovered, and the VAT taxation policy shall apply to the export business. If the circumstances are serious, the tax authority may suspend the handling of export tax refunds for the export enterprise within a certain period of time. If the act constitutes export tax fraud, the tax authority shall impose a fine of not less than one time but not more than five times the amount of the defrauded tax refund, and suspend the export tax refund right of the export enterprise upon approval of the tax authority at or above the provincial level. Those that meet the criminal filing standards will face criminal liability for the crime of defrauding export tax refunds.

Against this backdrop, enterprises that have adopted the "fake self-operation with genuine agency" business model in the past should transform their business models, strictly distinguish the boundary between self-operation and agency business, and guard against the aforementioned tax risks. For past businesses, they should promptly seek professional support for proper resolution to avoid the expansion of tax risks.