China’s economy has been struggling under the burden of local government debt, and reports have recently emerged overseas about the Chinese Communist Party (CCP) planning to impose an “overseas wealthy tax”. The news of “China to impose a tax on overseas wealthy individuals, media says China has globally imposed taxes” on October 21 has sparked widespread attention, trending on social media. Mainland state media confirmed that the CCP had introduced relevant policies years ago to prepare for the implementation of taxing the foreign personal income.
The rumor of China imposing an “overseas wealthy tax” has attracted attention both domestically and internationally.
The circulating information suggests that the CCP plans to tax high net worth individuals worldwide with Chinese citizenship, setting a threshold of “10 million USD” and affecting shareholders of overseas listed companies.
Bloomberg reported on October 15 that as the CCP began enforcing foreign investment regulations, some wealthy individuals in major Chinese cities faced up to a 20% tax on overseas investment returns.
Finance publication “First Finance” recently reported that there has long been a policy foundation for China’s “global taxation”.
In March this year, the National Taxation Bureau of the CCP’s State Administration of Taxation stated in an example case for individual income tax consolidation services and risk alerts that foreign income must be declared, warning against attempting to conceal it, and reaffirmed that residents must self-report and pay taxes on their foreign income. The “Individual Income Tax Law” stipulates that individuals must pay tax on income earned both domestically and overseas in China.
The “Individual Income Tax Law” clearly lists “obtaining foreign income” as a situation in which taxpayers must declare and pay taxes, requiring residents to report and pay taxes on income earned from abroad between March 1 and June 30 the following year.
Xiao Sa, a senior partner at Beijing Dacheng Law Firm, explained to local media that the relevant regulations introduced by the CCP in 2020 were aimed at preparing for the enforcement of taxing foreign personal income. However, enforcement has been lax in the past, mainly considering economic development and preventing capital outflows.
Xiao Sa stated that when the “Notice No. 3” was issued in 2020, it had already sparked attention. The resurgence of rumors this time has garnered widespread attention because strict implementation of the policy could significantly impact high net worth individuals with assets overseas.
The description of foreign income, the required tax amounts, methods of offsetting, tax-exempt or reduced ranges, declaration subjects, etc., in the “Notice No. 3” are already detailed.
The CCP’s introduction of this policy underscores the urgent need to expand revenue sources amidst declining land sales and slowing economic growth. Sun Guoxiang, a professor at the Department of International Affairs and Business at Taiwan’s Nanhua University, indicated to Epoch Times that the reasons for this measure include 1. China’s insufficient fiscal revenue. With China’s economic growth slowing, local government debts rising, and public expenditure increasing, the government needs to find new sources of income. Imposing taxes on overseas wealthy individuals can generate more revenue from high net worth individuals with substantial overseas assets or income, increasing the country’s fiscal income.
Sun Guoxiang analyzed that the CCP’s policies, especially those concerning economic distribution and fiscal collection, theoretically emphasize “common prosperity,” but in practice, when it comes to policy implementation, priority may be given to maintaining political stability or addressing government fiscal pressure. For instance, by increasing taxes or other collection measures, the government can strengthen its fiscal revenue to address local debts or invest in infrastructure, among other areas.
2. Preventing capital flight among Chinese wealthy individuals. Over the past few years, China has experienced significant capital flight as many wealthy individuals have moved their wealth overseas to avoid domestic taxes and policy risks. Through the imposition of an “overseas wealthy tax,” the CCP hopes to reduce capital flight and encourage these wealthy individuals to keep their funds in the country for investment.
Reportedly, many tax experts believe that taxing residents’ foreign income is a general trend, and the CCP’s actions could be just a matter of time. Xiao Sa noted that if the CCP rigorously enforces taxation in the future, it must also consider the issue of some taxable residents avoiding taxes through nationality switching or asset transfers.
For individuals without a residence in China, relevant supporting documents have had a 6-year “exemption period” since 2019, and the deadline for the first expiration is approaching.
According to the “Implementation Regulations of the People’s Republic of China on Individual Income Tax Law” revised by the CCP, partial “exemptions” are given for taxing individuals with foreign income who lack a residence in China. Individuals who have resided in China cumulatively for 183 days or more in a year and less than six consecutive years, and whose income originates from abroad and is paid by foreign units or individuals, are exempt from paying personal income tax on it after filing with the competent tax authority; and in any year when they have resided in China for 183 days, leaving for more than 30 days in a single time, the consecutive years of residence reset. The documents have been in effect since January 1, 2019.
A case reported by the State Administration of Taxation of the CCP showed that Xiao He was sent abroad by a domestic company to work at a foreign subsidiary for three years. The company submitted information on expatriate personnel to the tax authorities by the end of February each year. During the annual consolidation period, the unit reminded Xiao He to report his foreign income for tax in China, but he did not. Through big data analysis comparisons, the tax authorities found that Xiao He had tens of thousands of yuan in unreported foreign income and issued a notice to correct within a time limit. Xiao He paid the taxes and late payment fees.
According to the “Criteria for determining the residence time of individuals without a residence in China,” the determination of the residence time of individuals without a residence in China is an important factor in the 6-year cycle and the continuity of the residence within the cycle, with the documents effective since January 1, 2019.
This means that starting from 2019, if an individual without a residence in China has continuously resided in China for 183 days each year for six consecutive years without any single year having an absence of more than 30 days, they will be required to pay tax on their foreign income from the 7th year onwards; if any of the conditions are interrupted in any of the six years, the exemption from paying the individual’s foreign income tax continues into the 7th year.
Can the CCP’s imposition of an overseas wealthy tax benefit the ordinary people in mainland China?
Sun Guoxiang, professor of International Affairs and Business at Taiwan’s Nanhua University, pointed out that the Chinese government has emphasized the so-called “common prosperity” policy in recent years, claiming to narrow the wealth gap. Taxing wealthy individuals with enormous overseas wealth appears to align with the CCP’s rhetoric targeting the middle and lower classes.
However, he questioned whether the tax revenue collected from overseas wealthy individuals could be transformed into welfare for the people, indicating that the transparency of distribution and the actual implementation of policies by the CCP is lacking.