On Wednesday, August 12, Bloomberg columnist pointed out that China’s global pursuit of taxes on residents’ overseas investment returns may accelerate the separation of wealthy individuals from China due to the confusion in local enforcement standards.
Columnist and Chartered Financial Analyst Shuli Ren stated that China has rarely enforced the 20% capital gains tax in the past. However, facing financial constraints, the government has begun actively pursuing unpaid taxes on overseas investment returns.
The specific approach involves using the Common Reporting Standard (CRS) to seek information on overseas financial accounts. This global account information sharing network covers over 120 jurisdictions, including Hong Kong, Singapore, and the Cayman Islands.
The scope of this audit has widened in recent weeks to include overseas brokerage accounts, offshore family trusts, and foreign insurance policies. Chinese authorities have sent inquiries to super-rich and middle-class individuals.
According to Ren, in the eyes of Beijing, individuals who have long-term residency in mainland China or whose main source of wealth is in mainland China are considered Chinese tax residents, regardless of holding foreign passports.
She pointed out that as is often the case in China, the sudden implementation of a policy by authorities can lead to confusion.
Currently, there are many uncertainties regarding which investments need to be taxed, how capital gains are calculated, and whether Beijing has the authority to enforce its demands.
For example, China does not explicitly stipulate that insurance income must be taxed, nor are there clear exemptions. Moreover, domestic insurance policies are generally not taxed, but now there is a distinction in taxing overseas policies, creating uneven treatment.
According to estimates by Beijing-based economic research firm Gavekal Dragonomics, mainland Chinese households hold Hong Kong insurance policies worth approximately $250 billion to $450 billion.
Furthermore, taxes are collected by local tax authorities, and the calculation methods vary among different regions. For instance, in Shanghai, taxation occurs only when policyholders actually withdraw or realize gains, while in Nanjing, even accumulated but unrealized gains are included. Due to the strong performance of global stock markets in the past three years, these gains could be substantial.
Ren believes that these differences reflect the financial deficits of local governments and their differing levels of financial expertise, rather than unified and clear tax standards.
The offshore trust tax arrangements announced at the end of July follow the same pattern. The Chinese Ministry of Finance links the tax obligations of family trusts to contributors (settlor). Additionally, the Ministry of Finance explicitly states that even if an individual holds a foreign passport but their primary source of income is from mainland China, they still have tax obligations. In other words, tax obligations may arise even if the income has not been distributed to beneficiaries; the focus of responsibility will be on the settlor who established the trust and provided funds.
The Cayman trust of Chinese real estate tycoon Pan Shiyi’s family could become an indicator. The trust set up by his foreign wife has accumulated over HK$10 billion in dividends, with her being both the settlor and beneficiary.
The possibility of Beijing pursuing taxes from Chinese tycoons who have moved abroad and hold foreign citizenship will be closely watched. Pan Shiyi’s family has a three-month grace period to declare their tax obligations to Beijing.
The column points out that there is a fairness issue in the tax crackdown. Currently, China mainly targets tax collections from financial accounts and has not gone after super-rich individuals who own significant overseas real estate.
“This means that the super-rich can still enjoy their wealth freely. Meanwhile, ordinary people who rely on life insurance products to protect their families are being suffocated by enormous tax bills,” the article states.
Ren stated that she is not against taxation itself, and those with overseas investment income should declare it in accordance with the law. However, she views China’s current tax crackdown as more of a “purge” by the government, rushed, selective, and with opaque rules.
She believes that the likely result is that wealthy Chinese individuals will be more motivated to move abroad and accelerate cutting off all ties with China.