Beijing is moving to clarify newly imposed tax rules on offshore trusts after the measures left wealthy Chinese citizens and their advisers uncertain about how to comply, according to tax lawyers familiar with the situation.
The State Taxation Administration has been conducting large scale training for local tax officers to standardize how the levy applies to offshore trusts, including some set up decades ago, according to multiple tax lawyers in China and abroad. The agency has also distributed draft guidelines to domestic law and accounting firms and plans consultation sessions with lawyers in the coming weeks, according to several attorneys and advisers who spoke on condition of anonymity to discuss sensitive policy matters. Some of these people expect further draft guidance to follow, with the documents ultimately made public.
Windson Li, co-head of tax for Asia at DLA Piper, said the STA has been holding internal trainings at provincial, municipal and county levels to align interpretation across local tax offices. The Chinese Embassy in Singapore, as well as tax bureaus in Beijing, Shanghai and Guangdong, did not respond to CNBC’s requests for comment.
Last month, Beijing imposed a 20% tax on offshore trusts, structures that China’s wealthy families have long used to hold hundreds of billions of dollars outside the country. The announcement set off a rush for tax and legal advice, and many individuals scrambled to raise cash to cover the bill.
The levy applies at nearly every stage of a trust’s life, from establishment to profit distribution and wind-up. Individuals must also declare and settle any outstanding taxes on assets already transferred into such structures within 90 days of the rules being released, by Oct. 21, or face surcharges for late filing or nonpayment.
While the rules ended decades of regulatory ambiguity about these vehicles, they have also created fresh confusion over implementation. Trusts created after 2023 face the 20% charge at inception, but for older trusts, which are subject to an annual recurring tax, it remains unclear how many years back owners must declare, said Yuan Cao, a partner at law firm Yingke in Beijing.
Advisers have also warned that many trust assets could run afoul of foreign investment reporting rules issued in July, potentially inviting scrutiny from foreign exchange authorities over how the money left China in the first place.
Unresolved questions include whether the standard statute of limitations of three to five years applies to offshore trusts established before 2023, how much documentation is needed for a filing to be accepted or rejected, and whether the October deadline is the cutoff for declaration or for full payment, Li said. He added that local authorities are expected to become broadly aligned with the STA’s interpretation of these details over the coming weeks.
It is not uncommon for China’s central government to fine-tune major policy announcements through follow-up circulars. However, time spent waiting for clarification also eats into the window of 90 days. A lawyer based in Hong Kong, who asked not to be named because of the matter’s sensitivity, said local authorities had taken widely differing approaches before last month’s rules, and that the STA recognizes there is uncertainty.
Some wealthy individuals have previously reached lump sum settlements with provincial tax bureaus to resolve their liabilities, but it is unclear whether those agreements remain valid under Beijing’s new rules, according to multiple lawyers.
The tax push comes as Beijing searches for new sources of fiscal revenue. Land sales, long a mainstay of local government finances, have collapsed amid the property downturn. Personal income tax will become an increasingly important source of fiscal revenue as Beijing broadens the tax base to capture wealthier individuals and offshore wealth while enforcement improves, said Dan Wang, China director at Eurasia Group.
Officials said earlier this month that Chinese tax residents are required to pay tax on their worldwide income, including taxable returns from overseas insurance products. In the first half of this year, personal income tax collected reached roughly 900 billion yuan, or $133.5 billion, up 13% from a year earlier, the largest absolute increase among major Chinese tax categories, Wang noted.
Officials have also toughened their stance on capital leaving the country. Beijing banned three cross-border online brokerages from serving mainland users earlier this year, and some cities, including Beijing and Hangzhou, have begun taxing overseas insurance proceeds received by Chinese citizens, according to Chinese local media.
These measures can easily create a sense that a storm is gathering, said Neo Wang, chief China strategist at Evercore ISI, adding that these concerns may be overdone.
In late July, China’s State Council also issued new exit and entry regulations, effective in September, that expand the circumstances under which citizens can be barred from leaving the country, including for violations of export control rules that could endanger national technology and industrial security. The framework could give local authorities firmer legal ground to restrict departures by people they consider to owe tax, some advisers said.
Max Li, a director at EIK Business, a consultancy headquartered in the U.K., said: “Barring people with outstanding taxes from leaving China isn’t new, and some had been stopped at the border before the latest rules were announced. The latest regulations tighten an existing practice, and shouldn’t come as a surprise.”
With the October deadline drawing nearer, clearer guidance from the tax authority may prove essential for wealthy families trying to navigate the new rules.
