Chinese government says it will move to clarify ambiguities in offshore trust tax rules

The Chinese government is moving to clarify new tax rules for offshore trusts that have caused confusion among wealthy Chinese citizens and their advisers.

The China State Tax Administration is conducting extensive training for local tax officials to calibrate how to apply tax to offshore trusts, some of which were established decades ago, according to several onshore and offshore tax lawyers.

The National Tax Agency has also sent draft guidelines to domestic law and accounting firms and is planning a meeting with lawyers in the coming weeks, said several lawyers and advisors who did not wish to be named. Some of them hope that further draft guidance will be issued and that the document will eventually be made public.

Winson Lee, co-head of Asia tax at DLA Piper, said the STA is conducting internal training at provincial, city and county levels to ensure uniform interpretation across local tax offices.

The Chinese embassy in Singapore and the tax bureaus of Beijing, Shanghai and Guangdong province did not respond to CNBC’s requests for comment.

Last month, the Chinese government imposed a 20% tax on offshore trusts that China’s wealthy have long used to keep hundreds of billions of dollars offshore. The move sparked panic in tax and legal consultations and a scramble for cash to meet bills.

The levy applies at almost every stage of a trust’s life, from incorporation to profit distribution and liquidation. Individuals must also declare and settle unpaid taxes on assets already transferred to such structures within 90 days of the regulation’s publication (by October 21). Otherwise, additional fees will be levied for late or delinquent filings.

The rule ended decades of regulatory ambiguity regarding vehicles, but it also created new confusion about enforcement.

Trusts established after 2023 will be subject to a 20% fee at inception, but it remains unclear how many years in advance owners of old buildings must declare to be subject to the annual current tax, said Yuan Cao, a Beijing-based partner at law firm Yingke.

Advisers also warned that many trust assets could violate foreign investment reporting rules issued in July, potentially inviting scrutiny from foreign exchange authorities into how the funds left China in the first place.

Some questions include whether the three- to five-year standard statute of limitations applies to offshore trusts established before 2023. How extensive documentation is required for an application to be accepted or denied? DLA Piper’s Lee also addressed whether the October deadline is the deadline to file a return or to pay the full amount.

He added that local authorities are expected to largely agree with STA’s interpretation of these details in the coming weeks.

It is not uncommon for China’s central government to tweak major policy announcements through follow-up circulars. However, waiting time for rule clarification also eats into the 90-day window.

A Hong Kong-based lawyer, who requested anonymity due to the sensitivity of the matter, said that before last month’s rules were enacted, there were vastly different approaches from various local governments. The lawyer added that the STA also recognizes that there is uncertainty.

Lawyers said some wealthy individuals have previously negotiated lump sum settlements with provincial tax offices to settle their debts, but it was unclear whether such deals would remain valid under the Chinese government’s new rules.

The push to increase taxes comes as the Chinese government seeks new sources of fiscal revenue. Land sales, which had long been a pillar of local government finances, collapsed due to the real estate recession.

Dan Wang, China director at Eurasia Group, said personal income tax will become an increasingly important source of fiscal revenue as the Chinese government widens its tax base to capture the wealthy and offshore assets, while enforcement improves.

Tax residents of China will now have to pay taxes on their worldwide income, including tax returns from overseas insurance products, officials announced earlier this month.

Personal income taxes collected in the first half of this year amounted to about 900 billion yuan ($133.5 billion), up 13% from a year ago, the largest absolute increase among China’s major tax categories, Wang said.

Officials are also tightening their stance on capital outflows. Earlier this year, the Chinese government banned three cross-border online brokerage firms from providing services to mainland users, and some cities, including Beijing and Hangzhou, began taxing overseas insurance proceeds received by Chinese nationals, local media reported.

“Such measures could easily create a sense of a storm brewing,” said Neo Wang, chief China strategist at Evercore ISI, adding that such concerns could be overdone.

In late July, China’s State Council issued new immigration regulations (to take effect in September) that expand the circumstances in which citizens can be prohibited from leaving the country, including violations of export control regulations that could endanger national technology or industrial security.

Some advisers said the framework could give local governments a stronger legal basis to restrict the departure of people deemed liable to pay taxes.

“Banning people with tax arrears from leaving China is not new, and some were stopped at the border before the latest rules were announced,” said Max Li, director of UK-based advisory firm EIK Business. “The latest regulations strengthen existing practices and are not surprising.”