Global Market: China's wealthy rush to unwind offshore trusts as tax deadline looms

ETMarkets.com

Tax authorities have stepped up efforts to identify wealthy individuals with offshore assets.

The move comes as Beijing intensifies its scrutiny of capital outflows and tax compliance amid mounting fiscal pressures, persistent weakness in domestic demand and broader economic imbalances in the world's second-largest economy, according to the report by Reuters.

Also Read | Global Market Today: Asian stocks advance as selloff in chips eases

Tax authorities have stepped up efforts to identify wealthy individuals with offshore assets, with some local governments establishing dedicated teams to collect taxes on overseas income, according to people familiar with the measures.

Founders of Chinese companies listed in Hong Kong and the United States are likely to face the biggest impact, as many sold shares through offshore trusts at peak valuations between 2014 and 2020, said Oscar Liu, chief executive of wealth adviser JLT Legacy Group, according to the report.

The tax liabilities in individual cases could range from a few million yuan to hundreds of millions or even billions of yuan, Liu said.

Also Read | US stocks: Dow, S&P 500 end higher as traders shift from AI to healthcare

Beijing set an October 22 deadline in late July for declaring income from offshore trusts, with a 20% tax applying to such profits. The announcement triggered a scramble among wealthy Chinese individuals to calculate their potential liabilities.

Boston Consulting Group estimates China's offshore wealth at about $1.7 trillion. Offshore trusts have become increasingly popular among major shareholders of overseas-listed Chinese companies seeking to hold their wealth outside the mainland.

China's State Taxation Administration has instructed officials to pursue individuals potentially liable for offshore trust taxes, using information drawn from the Hurun wealth rankings, corporate filings and other publicly available sources, three people familiar with the matter said, Reuters reported.

Some provinces and cities with large concentrations of wealthy entrepreneurs have also established special task forces to gather information on offshore trusts, Liu said.

Wealthy families scramble to raise cash

The unexpected tax move has prompted some wealthy individuals to liquidate investments and seek financing to meet potential payment obligations. A lawyer advising family offices said clients could not offset losses from falling share prices against their tax bills. Some property developers who received substantial dividends in previous years were also struggling to pay because of the prolonged downturn in China's real estate sector, the report stated.

One technology billionaire's family office has shifted its focus from trading to calculating tax liabilities and is selling about half of its equity portfolio, a person working there said.

Banks have also begun offering loans to wealthy clients to cover tax payments, with shares in their own companies serving as collateral, according to a private banker at a major international bank who works with high-net-worth individuals and family offices.

The new tax regime has prompted some wealthy families to restructure their businesses and holdings. Some have even closed recently established trusts before transferring assets into them, a Hong Kong-based trust lawyer said.

In another case, a mainland Chinese woman who holds Hong Kong citizenship and works as an insurance agent in the financial hub said she was giving up her mainland residency to help keep her husband's wealth beyond Beijing's reach, despite his not being a mainland tax resident.

Liu said many offshore trust holders were likely to delay new investments while assessing their tax exposure.

Uncertainty over scope of tax rules

Despite the rush to prepare for the deadline, uncertainty over the new rules has complicated efforts to calculate liabilities and determine how much tax is owed.

Questions remain over which individuals fall within the scope of the rules, whether the tax applies retrospectively and how payments will be administered, Reuters reported.

The rules link tax liability to whether an individual's principal economic interests lie in China, a criterion that could be open to interpretation and may not be determined solely by citizenship or physical presence, said Wei Kang, a partner at law firm Charles Russell Speechlys who advises wealthy individuals and families on trusts, estates, tax and compliance.

It also remains unclear whether the tax applies from the date a trust was established or covers only a more limited period, Kang said.

Under the new requirements, individuals with offshore trust income must submit their own calculations of tax due by October 22 and make payments after the authorities confirm the amounts, Liu said.

Enforcement practices nevertheless vary across cities, leaving room in some cases for negotiations over repayment, seven people familiar with the matter said.

There is also no clear limit on how far back tax authorities can pursue liabilities relating to dividends or share sales, three people said, as per the report.

The lack of clarity has added to the pressure on wealthy families already dealing with falling asset values and uncertain economic conditions, as they try to determine the extent of their obligations before the deadline.