(Deutsche Welle Chinese website) On Friday (October 16), according to wealth consultants, lawyers and other people familiar with the matter, as the deadline for reporting overseas income approaches, some of China's top tycoons are dissolving offshore trusts, selling stocks, and even changing nationalities.
The move is part of China's efforts to step up scrutiny and enforcement of capital outflows. Currently, the world's second-largest economy is facing continued weak domestic demand and broader economic imbalances, and fiscal pressure is also increasing.
At the same time, tax officials have stepped up efforts to collect information on wealthy individuals in their jurisdictions and are forming specialized teams to recover taxes due on offshore earnings, people familiar with the matter said.
Oscar Liu, CEO of wealth advisory firm JLT Legacy Group, said founders of Chinese-funded companies listed in Hong Kong and the United States will be hardest hit by this new round of tax rules because many of them sold their shares through trusts during the peak valuation period from 2014 to 2020.
"We estimate that the tax payable in a single case may range from a few million yuan to hundreds of millions or even billions of yuan," Mr. Liu said. His company has offices in Hong Kong and Singapore.
In late July, Beijing set the filing deadline for offshore trust income as October 22 and levied a 20% personal income tax on such income. This triggered a rush among China's wealthy to calculate their tax burdens.
The Boston Consulting Group estimates China's offshore wealth at about $1.7 trillion. In recent years, offshore trusts have become increasingly popular and have become a tool for major shareholders of overseas-listed Chinese companies to store their wealth abroad.
China’s State Administration of Taxation has ordered staff to track down those who should pay offshore trust taxes based on lists compiled from the Hurun Rich List, company documents and other public information, three people familiar with the matter said.
The people spoke on condition of anonymity because the measures are confidential.
Mr. Liu added that in some provinces and cities with many wealthy entrepreneurs, tax authorities have set up task forces to collect information on offshore trusts.
China's State Council declined to respond to Reuters' request for comment. The State Administration of Taxation and the Ministry of Finance did not respond to requests for comment.
The unexpected new trust tax rules have triggered a rush for cash in some cases.
A family office lawyer said that clients cannot use stock price losses to deduct taxes; and real estate developers that have received large dividends in the past few years are now too weak due to the housing market downturn and are no longer able to pay the taxes they owe.
The family office of a tech billionaire says it now spends more time calculating taxes than making deals and is selling about half its stock portfolio.
“It’s like pulling the trigger,” said one person who works at the family office, referring to the requirement to pay taxes in cash within three months.
A private banker in charge of high-net-worth individuals and family offices at a major international bank said banks are now providing loans to private clients to help them pay their taxes, and the loans are pledged by the clients' shares in their own companies.
China's offshore trust tax system has also forced some wealthy individuals to reorganize their business and family wealth holding structures. A trust lawyer in Hong Kong said some people close newly established trusts even before they have assets loaded into them.
A mainlander with Hong Kong citizenship who now works as an insurance agent in the Asian financial hub said she is giving up her mainland residency to shield her husband's wealth from Beijing's jurisdiction, even though her husband is not a mainland tax resident.
JLT's Mr Liu said offshore trust holders were rarely in a hurry to make new investments during the tax accounting period.
Even wealthy Chinese who have begun to look for ways to pay taxes are confused by some unclear aspects of the new regulations, from who they are applicable to, to their retroactive effect to the payment process.
“The net is cast very wide,” said Wei Kang, a partner at law firm Charles Russell Speechlys. She advises high net worth individuals and families on complex trust and estate structuring, tax and compliance matters.
Ms. Kang added that new tax regulations introduced in July link tax obligations to whether a taxpayer's "main economic interests" are in China. This concept is open to interpretation and cannot necessarily be simply identified by actual place of residence or nationality.
It's also unclear whether the tax applies from the time the trust is created or only for a limited period, she said.
Mr. Liu of JLT Legacy Group said that the new regulations also require people with offshore trust income to submit the calculation of the tax payable by themselves before the October 22 deadline, and then pay it after the authorities confirm the amount.
But seven people familiar with the matter said that in practice, enforcement standards vary from city to city, and in some cases there is room to negotiate payment arrangements. There is also no clear deadline for how far back tax liability on dividends or stock sales can be pursued, three people familiar with the matter said.
“The devil is in the details,” Ms. Kang said. “Many details are still missing.”
