China's wealthy individuals are restructuring offshore trusts, selling investments and reassessing residency amid a new 20% tax on overseas trust income. With an October 22 declaration deadline approaching, uncertainty over enforcement and liabilities is prompting asset sales, borrowing and delayed investments as Beijing tightens scrutiny of offshore wealth. According to reports from Reuters, some of China's wealthiest individuals are winding down offshore trusts, selling shares and even changing nationality as they scramble to assess tax liabilities ahead of the deadline. The move represents part of tougher scrutiny of capital outflows and rule enforcement amid growing fiscal strains as the world's second-largest economy battles with persistent weakness in domestic demand and broader economic imbalances.
The tax liabilities in individual cases could range from a few million yuan to hundreds of millions or even billions of yuan, as reported by Reuters. Beijing set the October 22 deadline in late July for declaring income from offshore trusts, with the new tax regime triggering a scramble among wealthy Chinese individuals to calculate their potential liabilities. Boston Consulting Group estimates China's offshore wealth at about $1.7 trillion, with offshore trusts becoming increasingly popular among major shareholders of overseas-listed Chinese companies seeking to hold their wealth outside the mainland. The unexpected trust tax move has spurred a dash for cash in some cases, with some property developers who received large dividends in past years now too weak financially to pay what they owe as real estate languishes.
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. As reported by Reuters, China's State Taxation Administration has ordered employees to chase up those liable for offshore trust tax, working from a list drawn from the Hurun wealth rankings, corporate filings and other public information. Taxmen in some provinces and cities with numerous wealthy entrepreneurs have set up special task forces dedicated to gathering information on offshore trusts. The new rules tie liability to whether a taxpayer's "principal economic interest" lies in China, a concept open to interpretation that may not easily be settled by physical presence or citizenship.
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. 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. Questions remain over which individuals fall within the scope of the rules, whether the tax applies retrospectively and how payments will be administered. Even those of China's wealthy who have started looking for options to pay taxes are confused by some aspects of the new rules that are unclear, from coverage targets and retroactive application to payment logistics.
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, according to a person working there. A family office lawyer said clients cannot offset share-price losses against tax bills, while a tech billionaire's family office now spends more time calculating tax than trading. Banks are now lending to private clients to cover tax bills, with the loans secured against shares in the clients' own companies. The new tax regime has prompted some wealthy families to restructure their businesses and holdings, with some even closing newly established trusts before transferring assets into them. Some have even shut newly established trusts before funding them, according to a Hong Kong-based trust lawyer.
