Chinese authorities track wealthy individuals’ undeclared overseas income, intensifying tax collection pressure
Wealthy investors shift money from Singapore to the US in response to taxes on overseas assets
Changes in offshore asset management could dampen private investment sentiment

China is stepping up tax collection targeting wealthy individuals’ overseas trust earnings and undeclared income. The move aims to bring wealth accumulated in tax havens into the tax net, securing funds needed for “common prosperity” and strengthening the wealthy’s responsibility to pay taxes. Wealthy individuals ordered to report their income are selling shares to raise money for tax payments, while also considering dissolving overseas trusts or changing the countries where their assets are managed. However, concerns are emerging that delays in new investment and increased share sales during this process could weigh on private investment and the stock market.

Chinese Tax Authorities Extend Scrutiny to Wealthy Individuals’ Overseas Trusts

According to Bloomberg on the 22nd local time, Chinese tax authorities’ intensified taxation of resident taxpayers’ overseas trust earnings has brought substantial offshore assets held by Chinese billionaires within its scope. Bloomberg’s analysis of corporate disclosures and other materials found that major assets held through overseas trusts by eight Chinese businesspeople among the world’s 500 richest people totaled USD 140.2 billion (approximately USD 143 billion). They have used trusts in tax havens such as the British Virgin Islands and the Cayman Islands to manage corporate stakes and other holdings. Many of these assets were stakes acquired before their companies listed on US and Hong Kong stock exchanges, and their valuations grew substantially as share prices rose after listing. In July, authorities detailed plans to apply a 20% tax rate to overseas trust earnings and set the 22nd of this month as the deadline for declaring previously unreported income.

Authorities are also cross-checking rich lists against corporate disclosures to identify taxpayers. China’s State Taxation Administration reportedly compiled a list of individuals with tax obligations related to overseas trusts based on the Hurun Rich List, corporate disclosures and other sources, and instructed staff to track them down. The approach involves selecting investigation targets from rich lists, then examining shareholding structures disclosed in filings to identify links to overseas trusts. Some provinces and cities with large numbers of wealthy businesspeople have established dedicated teams to collect information on overseas trusts held by wealthy individuals in their jurisdictions. They also use information obtained through the Common Reporting Standard (CRS), a framework for exchanging financial account information between countries. Account information from overseas financial institutions can be cross-checked against data in China’s Golden Tax Phase IV tax information system, providing a basis for comparing wealthy individuals’ declarations with their actual overseas financial transactions.

Table 1. China’s Tighter Taxation of Overseas Trusts and Tracking Methods

China’s Wealthy Reassess Offshore Asset Management Strategies

Faced with authorities’ tracking efforts and reporting demands, wealthy individuals are rushing to secure cash to pay taxes. A family office managing the assets of a Chinese technology billionaire said it was selling roughly half its stock portfolio. An official at the office said it needed to raise cash within three months and was spending more time calculating taxes than working on investment deals. Those whose assets are tied up in real estate and other holdings that are difficult to sell have also turned to bank loans to fund their tax payments. An official at a global bank serving high-net-worth individuals and family offices said clients were borrowing money to pay taxes by pledging shares in their own companies as collateral.

Wealthy individuals have also begun reassessing the use of overseas trusts to manage assets. Rules introduced in July increased the burden of maintaining trusts by taxing valuation gains arising when stocks, real estate and other assets are transferred into them, as well as imposing annual taxes on income earned by trusts and their offshore subsidiaries. Ryan Lin, a lawyer advising high-net-worth individuals in Singapore, said in August that more than half of his roughly 50 trust clients were preparing to declare assets and pay taxes, while the rest were considering dissolving their trusts. Wealthy individuals who had planned to establish new trusts are also reconsidering. A trust lawyer in Hong Kong reported cases in which trusts were established but closed before assets were transferred into them, while an official at a local state-owned securities firm said some clients had abandoned plans to establish trusts and were investing through small offshore asset managers instead.

Some are also looking to change the countries where their assets are managed. Some wealthy Chinese individuals are considering the United States and Taiwan as alternative destinations for assets currently held in Hong Kong and Singapore. The United States does not participate in the Common Reporting Standard (CRS), and Taiwan does not automatically exchange financial account information with China, limiting Chinese authorities’ ability to obtain relevant information. Morgan Stanley’s New York wealth management division has reportedly seen a growing number of Chinese clients based in Hong Kong and Singapore opening accounts or transferring assets. In Singapore, Ocorian, a service provider for high-net-worth individuals, has seen fewer inquiries about setting up trusts and family offices, with some clients postponing or canceling their plans.

Chinese Investment Through Tax Havens Also Aimed to Acquire Technology

However, Chinese companies’ overseas investments routed through tax havens were also intended to secure advanced technology. Assets held in offshore entities included investments aimed at acquiring stakes in companies in advanced economies and bringing in technology. According to “China’s Global Ownership,” a study released by the National Bureau of Economic Research (NBER), about 38% of overseas companies owned by Chinese capital had intermediary entities in tax havens such as the Cayman Islands and Bermuda in their ownership structures. After tracing these entities’ ownership links, the researchers found that about 80% of overseas assets controlled by Chinese capital were located in Europe and North America. Companies with high research and development (R&D) intensity and supply-chain links to Chinese firms were particularly prominent investment targets.

The analysis also found that acquisitions of overseas companies helped Chinese parent companies build technological capabilities. In the same study, overseas companies acquired by Chinese firms increased their R&D spending by an average of about 7%. The number of patents registered by Chinese parent companies making their first acquisition in an advanced economy rose from an average of about 21 to 64 in the acquisition year. The researchers interpreted this as a “reverse innovation spillover” effect, in which knowledge and research achievements acquired through overseas investment flow into China. Government policies to foster industry also influenced these investment flows. Following the announcement of “Made in China 2025” in 2015, Chinese companies increased their overseas equity acquisitions in strategic industries targeted by the policy, and the tendency to expand R&D investment was particularly pronounced among overseas companies acquired by state-owned enterprises.

Tax Pressure on Businesspeople Could Dampen Private Investment

Given that China has built its technological competitiveness through corporate investment, some observers are concerned that pressure on businesspeople could weaken investment sentiment. Oscar Liu, CEO of wealth management firm JLT Legacy Group, said overseas trust holders were reluctant to make new investments because they were busy calculating their tax burdens. Until their tax liabilities are finalized, it is difficult to determine how much money they can invest. Uncertainty over the scope of taxation and the period of retroactive application is also complicating fund management. Wei Kang, a partner at law firm Charles Russell Speechlys who advises high-net-worth individuals, noted that room for interpretation remains over issues such as the criteria for determining whether an individual’s main economic interests are in China and when trust income becomes taxable.

If tighter tax collection is interpreted as a signal of expanding control over private companies, it could also encourage investors to sell Chinese assets. China’s markets have previously experienced sharp share-price declines and foreign capital outflows triggered by anxiety over government policy. On October 24, 2022, immediately after President Xi Jinping secured a third term and a leadership lineup dominated by his allies, Hong Kong’s Hang Seng Index fell 6.4% and the Hang Seng Tech Index dropped 9.7%. Investors at the time increasingly feared that restrictions on private companies and the zero-COVID policy would persist. Hong Kong-listed shares of Alibaba and Tencent each plunged about 11%, while foreign investors made net sales of CNY 17.9 billion (approximately USD 2.73 billion) in mainland shares through cross-border trading links between Hong Kong and the mainland. It was the largest one-day net outflow since the trading links were introduced in 2014. The latest taxation of overseas trusts could likewise pose short-term risks to the share prices of some overseas-listed Chinese companies.

Xi Jinping’s Political Calculations Behind the Push to Tax the Wealthy

Behind the Chinese leadership’s push to tax the wealthy despite concerns about weakening markets lies the political burden of its commitment to common prosperity. At a meeting of the Central Commission for Financial and Economic Affairs in August 2021, Xi said preventing income polarization and advancing common prosperity were necessary to safeguard social stability. He proposed stronger redistribution through taxation, social security and fiscal transfers, along with greater contributions to society from high-income earners. The same speech explicitly pledged tighter oversight of capital income and a crackdown on tax evasion. Xi also warned that a widening wealth gap and the collapse of the middle class could lead to social divisions and political polarization. His remarks reflected the view that mounting discontent over income inequality could undermine the foundations of the Communist Party’s long-term rule.

Bringing wealth accumulated overseas into the tax net carries political significance as a demonstration of the leadership’s determination to deliver common prosperity. The Financial Times (FT) analyzed the expanded tax collection as reflecting Xi’s vision of increasing contributions to the state from those who amassed great wealth through China’s economic growth and pursuing wealth redistribution. One interpretation is that, having repeatedly pledged common prosperity, the leadership risks weakening the credibility of its policies if it leaves wealthy individuals’ undeclared overseas income unaddressed. Meanwhile, declining land-sale revenue for local governments has increased the central government’s fiscal burden in supporting basic public services such as education and healthcare. The intensified collection of taxes on overseas income appears to reflect both a drive to secure funding for redistribution pledges and a desire to demonstrate that the wealthy, too, will be held responsible for paying taxes.