No, that alone doesn’t break any employment or tax laws in most countries. You just have to declare it properly and pay your taxes. And the employer has to follow local employment laws as if it were a local company. But that just means following the maximum allowed working hours, mandatory holidays, minimum wage, etc.
China is one of the few countries that might have an issue with people working for foreign companies in general.
Games developed by Paradox have been like this for decades and it’s fine. The player base is aware of it and buys the game with the expectation that it will take an additional 2 years and several dlcs for the game to be actually good. Everyone knew Victoria 3 won’t be good on release.
And crucially, the developers of Paradox are also aware of that and delivery a product that is still somewhat enjoyable on release. They know where to cut corners that will be fixed with dlcs and what needs to be focused on for release.
But when Paradox is just the publisher things don’t work out that well. Because the developers might not actually plan their game around that kind of thing. And when they are then forced to release early, their game is still a huge mess.