China’s tax authorities are putting more scrutiny on the offshore income of ultra/high net worth individuals (U/HNWIs), according to legal experts, in a move that could have ramifications for private bankers in key global wealth hubs.

While laws are already in place requiring Chinese citizens to declare and pay tax on overseas income, such laws were rarely enforced until now, industry experts told Asian Private Banker. 

In recent months, China’s tax authorities have begun asking the country’s citizens who are major shareholders of Hong Kong-listed companies whether they have reported their dividend earnings and paid requisite tax, people familiar with the matter said.

This potential tax revenue is considered “low-hanging fruit” given dividends and sales of shares in listed companies are public information in Hong Kong, the people said. This increased scrutiny has prompted some Chinese UHNWIs to reassess the structures they are using to hold overseas assets, they added.

“Offshore income has largely been ignored by the tax authorities, but, obviously, that is changing,” a Hong Kong-based wealth advisor told APB.

APB has been unable to determine how widespread the action is and how long it will last. China’s tax bureau has not responded to an email requesting comment.

Global investments

A growing number of wealthy individuals in China are focusing on offshore assets due to poor performance in the domestic markets, the government’s crackdown on sectors such as finance and Internet, as well as the country’s “Common Prosperity” push, which seeks to spread the growth of wealth more evenly. Immigration consultancy firm Henley & Partners has projected about 15,200 US dollar millionaires will emigrate out of China in 2024.

The enforcement of global tax rules may also be one more barrier to Chinese investors making overseas allocations, in addition to a lack of knowledge of overseas markets, language skills, and trusted partners, wealth and private banking experts said APB’s recent Summit event.

Global tax

In 2020, China’s Ministry of Finance and State Taxation Administration announced that an individual who is domiciled in China is also liable to pay income tax on worldwide income, initiating the global tax regime. A Chinese non-domiciled individual is taxed in accordance with the length of residence. Investment income and capital gains are generally taxed at a flat rate of 20% unless otherwise indicated.

However, some commentators believe the de facto rate of payable tax may be less than indicated by the authorities. “The actual enforcement may not have been so strict,” Xiao Sa, a mainland China-based lawyer at Dentons, wrote in a recent post, later telling Chinese media Yicai this may be because harsh enforcement could result in assets leaving China, having an economic impact.

Other industry experts believe that while the taxation rules have already been established, it may take some more time before mechanisms for compliance can catch up to facilitate enforcement.

Clifford Ng, Zhong Lun Law Firm

“The situation is inevitable, in a way. New laws are often announced before corresponding implementation rules or procedures are introduced at all levels. In some cases, it is difficult to comply right away because there is no mechanism for compliance,” commented Clifford Ng, partner at Zhong Lun Law Firm in Hong Kong.

Ng added that clients definitely still need to comply and come to a settlement with the tax authorities. This is especially the case given many of them are still PRC citizens and hold their wealth in China. “They may be able to negotiate down the amounts owed. However, it will not be zero,” he said.

How much does global tax help China?

China’s local governments have been grappling with slumping corporate revenues and protracted property market woes, reducing taxable income. Some cash-strapped cities have been chasing companies for taxes dating back many years, local the South China Morning Post reported earlier this year.

“This (offshore income tax) could be a good source of income for China, but it is also true that a share of those ultra-rich Chinese might not necessarily declare their overseas investment gains. While not surprising, I doubt the tax base will be enough to cover the hole that land sales have created in local government finances,” Alicia Garcia-Herrero, chief economist for Asia Pacific at Natixis, told APB.

Alicia Garcia Herrero, Natixis

The enforcement of global tax also tilts the balance in favour of making domestic investments rather than investing overseas, which could support China’s economy, Garcia-Herrero added.

Elsewhere, U/HNWIs are also facing increasing tax pressures from governments to replenish their coffers. The UK, for instance, is phasing out non-domiciled status, which has resulted in a rising wealth exodus.

With 9,500 HNWIs set to flee higher UK taxes, which wealth hubs will benefit?