The Chinese Communist Party (CCP) has expanded its taxation on overseas investments and income of Chinese citizens. Following the offshore trust, insurance products will now also be included in the target, causing turmoil in Hong Kong’s capital markets. Analysts believe that the primary goal of the CCP is still to plug the fiscal deficit.
On August 6th, following the news of the CCP expanding the taxation scope to offshore insurance income, insurance stocks in the Hong Kong stock market experienced a widespread plunge, with some individual stocks dropping by over 8% at midday.
By the afternoon closing, stocks such as AIA dropped by 5.92% to close at 73.15 Hong Kong dollars, PRU fell by 4.31% to close at 108.8 Hong Kong dollars, FWD Group declined by 5.59% to close at 29.72 Hong Kong dollars, and Manulife also dropped by 2.23% to close at 342.6 Hong Kong dollars.
According to a report by China Caixin on August 5th, mainland Chinese citizens have received official tax notices including Hong Kong insurance income in the collection scope. Consultations with tax lawyers, commercial banks, and professionals in the Hong Kong insurance industry confirm taxation cases in certain provinces and cities. The main cities currently involved in taxation include Hangzhou and Beijing, with some cases having tax rates reaching 20%. This taxation chiefly targets two sources of income: dividend payments from policies and interest income generated from pre-paid premiums.
A report by the UK’s Financial Times on August 5th points out that the CCP’s recent taxation actions focus on profits obtained from overseas assets. Multiple officials, bankers, and consultants have confirmed instances of retrospective audits, with some cases dating back to as early as 2000.
David Lesperance, managing partner of Lesperance and Associates, a firm specialized in international tax and immigration matters, revealed that due to increased pressure from Beijing’s tax investigations, at least six ultra-high net worth Chinese clients have initiated plans to officially leave the mainland this year.
Previously, the CCP government decided to levy wealth tax on offshore trusts. Starting from July 24th, a 20% tax is imposed on significant stages of offshore trust establishment, asset placement, ongoing operations, value appreciation, distribution, and termination. These offshore trusts in Hong Kong are estimated to have assets totaling $667 billion.
This measure has stirred panic among China’s wealthy class, as they are required to declare and pay taxes by October 22nd. Failure to do so will result in a daily surcharge of 0.05%. Reports suggest that the offshore trust of Zhang Yong, the founder of the hotpot restaurant chain Haidilao, may face several billion yuan in back taxes; the family of Zong Qinghou, founder of the Hangzhou-based beverage giant Wahaha Group, may need to pay around 2 to 2.5 billion yuan in taxes, depending on original tax certificates, tax resident status, and fund ownership determination; and the total tax burden for Pan Shiyi, founder of SOHO China, and his wife Zhang Xin, who transferred assets overseas via offshore trusts over 20 years ago, could reach as high as 5 to 7 billion yuan.
Victor Shih, a professor at the University of California, San Diego, bluntly stated that Beijing’s motive for expanding tax collection is “clearly for fiscal reasons.”
Public information indicates that land transfer revenue used to be the primary source of fiscal income for local governments in China. However, with the ongoing slump in the real estate market since the 2021 crisis, land transfer income has plummeted, putting government finances in distress.
Reportedly, to salvage the dwindling financial resources, Chinese tax authorities have shifted their focus to the overseas assets of the wealthy. They have initiated strict scrutiny on overseas capital gains and investments, significantly curbing the space for the wealthy to transfer assets abroad or evade taxes through foreign tools.