Recently, the deadline for individual tax reporting on offshore trust income set by the Chinese Communist Party is approaching. Zhang Yong, the founder of the popular hot pot chain Haidilao, has borrowed the equivalent of 100 million Chinese yuan in Hong Kong dollars from the company for a short-term loan. Zhang Yong and his wife had previously cashed out around 2.7 billion Hong Kong dollars, which the market widely believes is related to tax payment.
In an announcement on October 12th, Haidilao stated that the company provided a loan in Hong Kong dollars to its controlling shareholder, chairman of the board, and CEO Zhang Yong, with a maximum amount equivalent to RMB 100 million, with a 30-day term and an interest rate of the Hong Kong Interbank Offered Rate plus 60 basis points. The loan is unsecured and is intended for Zhang Yong’s personal financial arrangements. The company stated that it will utilize internal resources and that this will not affect daily operations and business development. However, this loan has still raised concerns in the market. On the morning of October 13th, Haidilao’s stock price fell by over 7%.
In May of this year, Zhang Yong had invested 152 million Hong Kong dollars to increase his stake in Haidilao by 11.35 million shares at a cost price of 13.39 Hong Kong dollars per share. However, just four months later, Zhang Yong’s wife, Shu Ping, cashed out 2.75 billion Hong Kong dollars at a price of 10.62 Hong Kong dollars, causing the stock price to drop by 20%. This resulted in a significant loss of tens of millions of Hong Kong dollars on paper, essentially a forced sell-off.
Within a week of the cash-out news, Haidilao’s stock price plummeted by another 10%, currently trading below 10 Hong Kong dollars. Compared to its historical peak five years ago, Haidilao’s market value has evaporated by over 400 billion Hong Kong dollars. It is reported that Zhang Yong and his wife’s actions were essentially to cover a tax payment of 2 billion yuan and deemed as a last resort.
In late July, the Chinese Communist Party implemented tax recovery measures for individuals with overseas assets, requiring proactive reporting and payment of taxes on offshore trusts. The window for proactive reporting is 90 days, ending on October 22nd. Failure to comply will result in additional fines and penalties.
The challenges faced by Zhang Yong and his wife are just the tip of the iceberg in this wave of overseas asset tax recovery. A report by “Sina Finance” in July revealed a list of “successful entrepreneurs” potentially subject to tax recovery, with some estimating tax amounts in the tens of billions.
The report breaks down the tax burden that these successful entrepreneurs may face into back taxes from trust dividends and deferred tax liabilities from future sales of trust holdings. It estimates that Huang Zheng, with approximately a quarter stake in Pinduoduo valued at around 250 billion yuan, may face potential taxes of around 50 billion yuan; Lei Jun’s stake in Xiaomi, of similar value, also in the 50 billion yuan range; Jack Ma around 17 billion yuan, Lin Bin about 15 billion yuan; Richard Liu, Zhang Yong, Xu Shihui, Wang Xing each around 8 billion yuan, and Wu Yajun around 5 billion yuan.
These figures are not official tax amounts. Particularly, the estimation of hundreds of billions mainly involves potential future tax liabilities upon disposal of holdings, not necessarily required to be paid by October 22nd. The report suggests that although this money does not need to be paid immediately, it looms like the sword of Damocles over their heads, ready to fall once assets are liquidated in the future.
Facing pressure from the Chinese Communist Party on the taxation of personal offshore income, “Financial Times” reported on October 7th that Chinese billionaires and wealth management institutions in Hong Kong, Singapore, and Tokyo are reevaluating offshore assets and tax arrangements. Some Singaporean wealth advisors mentioned that clients are considering transferring assets to the United States or Taiwan, as the U.S. is not part of the Organization for Economic Cooperation and Development’s Common Reporting Standard.