The deadline for the Chinese Communist Party to impose taxes on offshore trusts and other income of the wealthy is nearing, and this move will have a significant impact on 8 Chinese billionaires including Netease founder Ding Lei, Pinduoduo founder Huang Zheng, and Xiaomi Group founder Lei Jun.
In recent years, the Chinese Communist Party has faced financial difficulties and has increased its efforts to investigate the overseas assets of Chinese billionaires to increase fiscal revenue. On July 24th, the authorities issued the “Announcement on Personal Income Tax Matters related to Offshore Trusts,” requiring Chinese tax residents involved in offshore trusts to declare relevant assets and income, and to settle unpaid taxes before the deadline of October 22nd. The new regulations impose a 20% income tax on the transfer of trust assets and related income that meet certain conditions.
According to a report by Bloomberg on October 20th, the Bloomberg Billionaires Index shows that among the top 500 billionaires globally, 8 individuals and their beneficiaries may be significantly affected by this measure by the Chinese Communist Party. These billionaires hold equity in listed companies through overseas trusts, with the majority of related enterprises operating in China. As of the 16th, the total assets held by these billionaires through their respective trusts amount to around $140.2 billion. The Chinese government has not publicly named any individuals yet, and it is unclear whether these billionaires need to pay taxes on the income from their overseas trusts or if they have been required to pay the relevant taxes.
These 8 billionaires have founded some of China’s most well-known companies, and they have established trust funds in tax havens such as the British Virgin Islands and the Cayman Islands. They include Ding Lei, who has approximately $37 billion in overseas assets, Huang Zheng with $29 billion in overseas assets, Lei Jun of Xiaomi, Zhong Huijuan of Hansoh Pharmaceutical, the Zhang Bo family of China Hongqiao Group, Wang Ning of Pinduoduo, Yang Shaopeng of Haifeng International, and Ding Shizhong of Anta Sports.
In response to media inquiries, a spokesperson for aluminum producer China Hongqiao Group stated that associating the company’s CEO Zhang Bo and senior management with tax policy changes is misleading. The spokespersons for the other 7 companies did not respond.
Based on data from the US and Hong Kong stock exchanges, a significant portion of the overseas wealth of these Chinese billionaires comes from investments made before their companies went public through initial public offerings (IPOs). For example, the valuations of Pinduoduo and Pinduoduo Mart have skyrocketed since their IPOs, leading to billion-dollar increases in the founders’ net worth.
Hu Ledian, a partner at Ince & Co Hong Kong, mentioned that this wave of tax reclamation would have a greater impact on existing trust wealth. “Once a company goes public, the increase in the value of assets will be considerable,” and clients of listed companies “are looking for lawyers who can redesign trust structures, rather than simply follow the regulations.” However, he emphasized that his statements were based on conversations with clients and not on the 8 billionaires mentioned by Bloomberg.
Carlos Casanova, Senior Asia Economist at Swiss private bank UBP, noted that “China (CCP) needs to improve the sources of income for central and local governments, and is thus considering overseas wealth as one of the channels to explore.”
So, what strategies do Chinese billionaires and entrepreneurs have in response? Bloomberg reported that other entrepreneurs have turned to selling shares to investors to raise funds needed for tax payments. In anticipation of the new tax measures, the founders of restaurant chain Haidilao International Holding Ltd and job recruitment platform Boss Zhipin Technology Co Ltd sold shares worth hundreds of millions of dollars.
According to an announcement by Haidilao on October 12th on the Hong Kong Stock Exchange, the company provided a loan of up to HK$100 million equivalent to Chairman and CEO Zhang Yong, with a term of 30 days and an interest rate of the Hong Kong Interbank Offered Rate plus 60 basis points per month. The loan is unsecured and intended for Zhang Yong’s personal financial arrangements. The company stated that internal resources would be used and that it would not affect daily operations or business development. Nevertheless, this loan has drawn market attention.
On October 17th, Chen Yishen, Chairman of the Business Law Committee of the Taipei Bar Association in Taiwan, wrote an article suggesting that the bursting of the real estate bubble in China has led to the depletion of local government land sale revenues. The CCP has been squeezing private enterprises nationwide under the guise of “common prosperity,” and now they are targeting overseas assets.
The article mentions that a regime that uses “common prosperity” as a fig leaf for looting private property, even going after overseas family trusts for past payments, fails to realize that capital and talent will always vote with their feet. This thuggish method of robbing the hen for its eggs will only accelerate the exodus of the last group of elites who control wealth and business networks, leading China’s already hemorrhaging economy to complete desiccation.