Amid continued domestic weakness and broader economic imbalances, the Chinese Communist Party is intensifying its control over capital outflows. According to wealth consultants, lawyers, and other sources, as the deadline for reporting overseas earnings approaches, some of China’s wealthiest individuals are gradually exiting offshore trusts, selling stocks, and even relinquishing their residency rights in mainland China.
Reported by Reuters on October 16th, Oscar Liu, the CEO of wealth consultancy firm JLT Legacy Group, stated that founders of Chinese companies listed in Hong Kong and the United States are being hit the hardest by the latest tax policies, as many of them sold shares through trusts at peak valuations between 2014 and 2020.
Liu said, “We estimate that the tax liability in individual cases could range from several million RMB to tens of billions of RMB.” Liu’s company has offices in Hong Kong and Singapore.
In late July, the Chinese government set October 22nd as the deadline for reporting offshore trust income and will impose a 20% tax on such earnings.
In recent years, offshore trusts have become a favored tool for wealthy Chinese individuals to shift their wealth overseas, especially among major shareholders of Chinese companies listed abroad. According to Boston Consulting Group, Chinese offshore wealth amounts to around $1.7 trillion.
Official data from the Chinese government shows a deficit of $1.9 trillion in central and local government expenditures over income last year. With the real estate market continuing to slump and local governments losing revenue from land sales, there is a push to seek new funding sources, refocusing on the wealthy.
Three sources revealed to Reuters that the State Administration of Taxation has instructed staff to trace individuals liable for offshore trust taxes based on the Hurun Rich List, company documents, and other public information.
Due to the confidential nature of these measures, the three sources requested anonymity.
Liu added that in provinces and cities where wealthy businessmen are concentrated, tax authorities have set up dedicated task forces to collect offshore trust information.
A family office lawyer mentioned that clients cannot offset taxes with falling stock prices, and developers who received high dividends in recent years are now struggling to pay taxes due to the sluggish real estate market.
A family office of a tech billionaire stated they now spend more time on tax calculations than on actual trades and are selling about half of their stock portfolio.
“It’s like having the rug pulled out from under you,” said a person working in the office, referring to being required to pay taxes in cash within three months.
A private banker at a major international bank mentioned that banks are now offering loans with clients’ company shares as collateral to cover tax payments, catering specifically to high net worth individuals and family offices.
To meet their tax obligations, some Chinese tycoons have started using overseas assets as collateral for bank loans, leading to major revenue growth for banks like Goldman Sachs and JPMorgan.
The Chinese offshore trust tax system has also forced some tycoons to restructure their corporate and family wealth holdings. A trust lawyer in Hong Kong mentioned that some individuals even closed newly established trusts before funding them.
A mainland Chinese national currently working as an insurance agent in Hong Kong, who gave up her residency rights in mainland China, stated she did so to keep her husband’s wealth out of Beijing’s oversight, even though her husband is not a tax resident in mainland China.
Liu noted that as offshore trust holders calculate their tax liabilities, few are eager to make new investments.
Even Chinese tycoons who have begun looking for tax payment solutions are confused by some unclear aspects of the new regulations, such as the scope of taxation, retroactive application, and the tax payment process.
“The regulatory scope is very wide,” said Wei Kang, a partner at the law firm Charles Russell Speechlys, providing consulting services on complex trusts, estate structures, tax, and compliance for high net worth individuals and families.
Wei Kang further explained that the new tax law in July links tax obligations to whether a taxpayer’s “main economic interests” are tied to China, a concept prone to ambiguity that cannot be easily determined solely based on actual residence or nationality.
She also mentioned that it is currently unclear whether the tax will be effective from the date of trust establishment or only within a specific timeframe.
Christine Wong, a senior researcher at the East Asian Institute of the National University of Singapore, told Bloomberg that in the past, the Chinese tax authority was more concerned with meeting revenue targets rather than enforcing tax laws. But times have changed, and now the Chinese government is truly in need of funds.