China launches global tax hunt

China’s Ministry of Finance and tax authority issued new rules on July 24 that bring offshore trusts used by wealthy Chinese families into a clearer tax net, setting off a rush for legal and tax advice in Hong Kong and Singapore. The rules impose a 20% levy at multiple stages of a trust’s life and give families until Oct. 22 to declare and pay tax owed on assets moved into trusts since the start of 2023, CNBC reported. Chinese authorities are also pursuing a broader review of overseas assets and capital gains as Beijing looks for back taxes from wealthy residents, according to the Financial Times, as cited by the Financial Post. Mainland stocks were broadly steady on Thursday, while Hong Kong insurers weighed on the market, according to Reuters market coverage published by Business Recorder. ### What changed in the offshore-trust rules? July 24 is the key date. CNBC reported that China’s Ministry of Finance and the tax authority issued what it called the clearest rules yet on how offshore trusts should be taxed, ending years in which the treatment of those structures had not been clearly spelled out. The new framework applies a 20% tax at nearly every stage of a trust’s life, from establishment to profit distribution and termination. (cnbc.com) A 90-day transition window is also central to the new regime. Families must declare and pay outstanding amounts on assets transferred into offshore trusts since the start of 2023 by Oct. 22, and late declarations or non-payment can trigger surcharges, CNBC reported. Baker McKenzie, in a client update dated Aug. 3, said the rules took immediate effect and created a look-through, life-cycle taxation and reporting regime for offshore trusts linked to China. (cnbc.com) ### Why are wealthy families calling advisers now? Hong Kong and Singapore are the two places named most often in the early response. CNBC reported that calls have poured in from wealthy families, private banks, trust companies and insurers as clients try to determine whether they are affected, how large their tax bills may be and how to settle them before the grace period expires. Clifford Ng, a Hong Kong-based partner at Zhong Lun, said “many clients, trustees, and advisors are still in shock,” according to CNBC. (cnbc.com) Kia Meng Loh, chief operating officer and senior partner at Dentons Rodyk in Singapore, told CNBC that some clients were already weighing which assets to sell to raise cash for payments. He described the change as “a watershed moment for China-linked private wealth planning,” CNBC reported. ### How big is the money involved? (cnbc.com) HK$5.2 trillion, or about $667 billion, is the figure CNBC cited for assets held under trusts in Hong Kong alone in 2023, based on a report by KPMG and the Hong Kong Trustees’ Association. CNBC said 55% of the underlying investments were located in mainland China and Hong Kong, underscoring how much of the trust industry is tied to Chinese wealth. (cnbc.com) The Financial Times, in a report cited by the Financial Post, said China had launched a global hunt for hundreds of billions of dollars in unpaid taxes going back decades. That report said authorities had stepped up scrutiny of overseas capital gains and investments as Beijing sought revenue amid a deeper fiscal hole. (cnbc.com) ### Is this only about new trust taxes, or a wider enforcement push? The broader campaign appears to extend beyond the July 24 trust rules. The Financial Times report cited by the Financial Post described a global effort to recover unpaid taxes tied to overseas assets and gains, reaching back years. Baker McKenzie said the new trust regime could bring historical arrangements under fresh scrutiny and warned that a “wait-and-see” approach was no longer low risk. (financialpost.com) Baker McKenzie also said the rules expressly refer to “economic interest” when assessing whether an individual may be treated as PRC-domiciled, even if that person has foreign nationality or long-term overseas residence. The firm said it remained unclear whether that concept would stay confined to offshore trusts or extend further. (financialpost.com) ### What did markets do after the move surfaced? Thursday’s market reaction was uneven. Reuters market coverage published by Business Recorder said mainland China stocks traded largely steady, with gains in bullion-related shares offsetting weakness in technology stocks, while insurers dragged on Hong Kong equities. The next concrete deadline is Oct. 22. (bakermckenzie.com) That is when families covered by the new offshore-trust rules must declare and pay tax owed on assets transferred into trusts since the start of 2023, while advisers in Hong Kong and Singapore continue to process exposure reviews, filings and payment plans. (cnbc.com) (brecorder.com)