China’s super-rich scramble to exit offshore trusts, raise cash as taxman knocks

Some of China's wealthiest individuals are winding down their offshore trusts, selling shares, and even changing their nationality as a crucial tax deadline approaches, according to wealth advisers, lawyers, and other sources familiar with the situation. This action comes amid increased scrutiny of capital outflows and stricter rule enforcement due to the Chinese economy's persistent weakness in domestic demand and broader economic imbalances.

Tax officials have ramped up their efforts to gather information on wealthy individuals and are setting up dedicated teams to collect taxes owed on offshore incomes. Those who founded Hong Kong- and U.S.-listed Chinese firms are particularly affected, as they potentially face tax liabilities ranging from a few million yuan to hundreds of millions of yuan or even billions.

Beijing set an October 22 deadline for offshore trust income declarations, imposing a 20% tax on such profits. China's State Taxation Administration is targeting those liable for offshore trust tax based on Hurun wealth rankings, corporate filings, and other public information. Special task forces have been established in some provinces and cities with numerous wealthy entrepreneurs to gather information on offshore trusts.

This unexpected tax move has led to a scramble for cash in some cases, with a family office lawyer noting that clients cannot offset share-price losses against tax bills. Property developers, who received large dividends in the past, are now struggling financially to pay their tax obligations. However, the tax regime has also forced some wealthy individuals to restructure their businesses and family wealth holdings, with some even shutting newly established trusts before funding them.

The new tax rule ties liability to whether a taxpayer's principal economic interest lies in China, a concept that is open to interpretation and may not be easily settled by physical presence or citizenship. The rules also require taxpayers to submit their own calculation of tax due by the October 22 deadline, but enforcement varies by city, and there is no clear limit on how far back tax liability on dividends or share sales stretches.