"Chengdu Tax Attorneys | Curious About the 'Cat Tax'? A Practical Guide to Navigating Individual Income Tax Risks Amid the TikTok Refugee Phenomenon"

The “TikTok Refugee” Incident and Its Broader Implications

1. The “TikTok Refugee” Phenomenon on Xiaohongshu

Recently, Xiaohongshu (Little Red Book) has seen a surge in activity following what is being called the “TikTok Refugee” phenomenon. As the U.S. government’s ban on TikTok looms, many American users have turned to alternative platforms, with Xiaohongshu becoming a top choice. These users, self-identified as “TikTok Refugees,” have been posting content to rebuild the communities they cultivated on TikTok. This influx has propelled Xiaohongshu to the top of Apple’s App Store free charts in the U.S.

The U.S. government has given TikTok’s parent company, ByteDance, until January 19, 2025, to sell its U.S. operations, citing national security concerns. ByteDance has refused, increasing the likelihood of TikTok’s removal from the U.S. market. Faced with this uncertainty, many American users are seeking new platforms, and Xiaohongshu has emerged as a favorite.

Newly arrived American users on Xiaohongshu are posting a variety of content, including self-introductions, pet photos, and progress updates on learning Chinese. Despite language barriers, they are engaging with Chinese users using translation tools and even beginning to learn Chinese to better integrate into the Xiaohongshu community.

This cross-cultural exchange has sparked vibrant interactions, with both Chinese and American users sharing their daily lives and cultural experiences. This phenomenon has transformed Xiaohongshu into a unique space for fostering mutual understanding between the two groups.

2. The Concept of the “Cat Tax”

What is the “Cat Tax”?
The “Cat Tax” is an internet phenomenon where users share photos or videos of their pets—primarily cats—to gain attention, interaction, or even monetary benefits. In Chinese internet culture, the phrase “吸猫” (xi mao), meaning “cat obsession,” reflects a deep love for cats, akin to terms like “cat cuddling” or “cat lover” in English. The term “tax” humorously suggests that viewers “pay” for their enjoyment of such content through likes, comments, or other forms of support.

The “Cat Tax” in the TikTok Refugee Context
American users migrating to Xiaohongshu have embraced Chinese cultural nuances, including the concept of the “Cat Tax.” They share adorable, funny, or heartwarming cat content to attract Chinese users’ attention. In response, Chinese users engage through likes, comments, and shares, with some American users leveraging this engagement to monetize through live streams or product links.

This cat-centric content has become a cultural bridge, with its universal appeal helping to overcome language barriers. Chinese users have even coined the term “paying the cat tax” to describe this cultural exchange, as American users adapt to Xiaohongshu’s community norms through “cat culture.”

3. Chinese Individual Income Tax Law and Its Scope

Tax Residency
Under Chinese tax law, individuals who reside in China for more than 183 days and meet other criteria are classified as tax residents. Tax residents must pay income tax on their global earnings in China. Non-residents, on the other hand, are taxed only on income sourced within China.

China-Sourced Income
Income is considered China-sourced if it is connected to labor, business activities, or assets within China. For example, if American users earn income through Xiaohongshu, such as via collaborations with Chinese businesses, advertising, or live-streaming sales, this income may be subject to Chinese income tax.

4. Tax Obligations and Scenarios for American Users

The U.S. Tax System
The U.S. employs a global taxation system, requiring U.S. citizens and green card holders to report and pay taxes on their worldwide income to the IRS, regardless of where the income is earned. However, the U.S.-China Tax Treaty helps mitigate double taxation.

Avoiding Double Taxation
If American users pay income tax in China, they can claim a Foreign Tax Credit (FTC) in the U.S., which offsets their U.S. tax liability. However, if China’s tax rate is lower than that of the U.S., they may still need to pay the difference to the IRS.

Potential Tax Scenarios for American Users

  1. Residing in China for Over 183 Days
    • Classified as Chinese tax residents and required to pay Chinese income tax on global earnings. Taxes paid in China may be used for a U.S. FTC.
  2. Not a Tax Resident but Earning China-Sourced Income
    • Only taxed on income sourced from China, such as advertising revenue or live-streaming income. Disputes may arise if income is paid to non-Chinese accounts.
  3. Operating Entirely from the U.S.
    • If income is entirely U.S.-sourced, no Chinese tax is owed.

5. Tax Considerations for Chinese Users

Primary Income Scenarios

  1. Advertising, Live-Streaming, or Product Sales
    • Income from Xiaohongshu activities is typically classified as labor or business income. Taxes may be withheld by the platform or self-reported by users.
  2. Royalties from Content Licensing
    • Income earned from licensing content like photos or articles is treated as royalties.
  3. Direct Collaborations
    • Income from partnerships with American users may be categorized as business income and taxed accordingly.

Applicable Tax Rates and Deductions

  • Comprehensive Income: Subject to progressive rates from 3% to 45%.
  • Business Income: Taxed progressively from 5% to 35%.
  • Royalties: Typically taxed as labor income.
  • Deductions: Costs such as equipment expenses and platform fees can be deducted.

Global Income and Tax Credits
Chinese tax residents earning income from American users must declare their global income. Taxes paid in the U.S. may qualify for a tax credit under the U.S.-China Tax Treaty. Proper documentation, such as U.S. tax receipts, is essential for this process.

6. Professional Tax Compliance Advice

  1. Consult Tax Experts
    Cross-border tax compliance is complex. It is crucial to consult professionals familiar with both U.S. and Chinese tax laws.
  2. Keep Detailed Records
    Maintain thorough documentation of contracts, invoices, and transactions for tax reporting or audits.
  3. Understand Tax Treaties
    Leverage the U.S.-China Tax Treaty to avoid double taxation.
  4. Check Registration Requirements
    Depending on income thresholds, registration with Chinese tax authorities may be necessary.

Conclusion

The tax obligations for American users on Xiaohongshu depend on their residency status and income source. Income deemed China-sourced may require reporting and taxation in China, with possible tax credits available in the U.S. Compliance requires careful navigation of Chinese tax law, the U.S.-China Tax Treaty, and the unique income structures of cross-border digital platforms.

For Chinese users, income earned from American collaborations or Xiaohongshu activities must be reported under China’s tax framework. Properly applying deductions and tax credits can minimize liabilities and ensure compliance with both domestic and international tax laws.

Seeking professional advice remains essential for navigating the complexities of cross-border taxation.

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