Introduction
The Chinese government implemented new anti-tax evasion regulations in September, 2018. These rules dictate that certain information must be exchanged between China and other jurisdictions.
Financial institutions in China started gathering pertinent information beginning in January 2017.
Businesses must be aware of the information that will be shared between countries and how the financial information exchange will affect them.
The most important aspect of these regulations is the Common Reporting Standard (CRS).
The CRS in China
The CRS is a program used in multiple countries that enables them to share certain financial information about foreign investors with the country where the investor resides.
This program was implemented to confront money laundering, tax evasion and concealing wealth.
By working together, the countries are able to protect their respective tax systems. If the individual does not comply with this program, legal action is possible.
Under this program, jurisdictions must get information from banks and other financial institutions in their country and automatically share it with other countries every year. Information that is shared includes:
- Identifying information about the China bank account owner, including the owner’s name, date of birth, age and sex
- Location of residence
- Account number
- Investment income earnings
- Account balances
- Sales proceeds from financial assets connected to the account
Which Financial Institutions Must Adhere to the CRS in China
There are a number of financial institutions that are subject to the CRS in China, including the following:
- Banks
- Asset managers
- Insurance companies
- Intermediaries
- Custodians
- Brokers
Who Is Subject to the CRS in China?
Individuals who are considered non-residents for tax purposes who live in a jurisdiction subject to the CRS must comply with the CRS. If the location where the financial institution is located is subject to the CRS, it must provide information about non-residents and their financial accounts to the respective national tax authority where the individual is a tax resident.
In China, a person is considered a tax resident in the country if they reside in this country for 183 days or more in a given tax year.
A person can also be considered a tax resident of China if they have a domicile in the country, which means habitual residence in the country to the registration of a domicile in China or due to economic interests or family ties.
Which Assets Are Subject to the CRS in China?
The CRS requires that information regarding certain assets be shared between countries. The information that is subject to the CRS in China generally breaks down into the following two categories:
Financial Assets
Financial assets were the main concern of the CRS. The majority of information related to financial assets will be automatically reported to the account owner’s home country or where he or she is considered a tax resident.
Overseas Property
Another type of asset that is subject to the automatic share of information between countries is overseas property.
If a person owns the property directly, the CRS is not implicated.
However, if the property owner purchases the overseas property with the help of a company or a trust, the CRS considers the company or trust an entity. Disclosure is necessary if the company or trust is considered a financial institution according to the CRS.
Not all entities are classified in this way and may not be subject to the CRS.
It is more likely that the entity will be subject to the CRS if the owner holds the property indirectly between multiple entities. In this situation, an analysis of each entity or holding company must be completed.
Process of Complying with the CRS in China
The financial institution implements the CRS. Then, it asks new account owners to certify their residence for tax purposes.
If the new account owner is a tax resident in another country, the financial institution reports the account information to the national tax authority where the account owner is considered a resident.
For example, if another country was reporting the account to China authorities, it would report it to the State Administration of Taxation of the People’s Republic of China.
Even if the residence country has not adopted the CRS, the financial institution still shares the details of the account.
The national tax authority only shares account information with other countries if they have actually adopted the CRS and also signed a special agreement allowing for the exchange of this information.
The financial institution continues to provide the Automatic Exchange of Information while the account is open. If the financial institution does not comply with these measures, it can be subject to regulatory and financial sanctions.
Information for Foreign Account Owners in China
Business owners and individuals who have a financial account in China should be conscious of the automatic exchange of information and the common reporting standard.
When these individuals request to open a financial account in China, the financial institution asks for additional information about the individual, such as their foreign tax identification number.
Most individuals and businesses in China who are not considered tax residents who open foreign accounts will likely be subject to the CRS.
This is important for individuals and businesses to know because their information will likely be shared with their home country. Therefore, they should be aware of this and be prepared to adapt their tax strategy to this reality.
This information is shared on an annual basis.
Get Help with Establishing Your Company in China
Horizons provides advice on company incorporation and which entity is best for your needs.
We offer a number of important services to help you launch your business in China, including PEO services and strategic consulting services. Our team will use their detailed knowledge of the tax system to make you aware of reporting requirements and how they can affect your business.
We can also assist you with compliance and regulatory matters so that you do not have to actively worry about these rules in China. Contact us to learn more about our extensive service offerings.
