[October 21, 2024] As China's economy continues to struggle and local government debt piles up, reports have emerged that the Chinese Communist Party (CCP) plans to impose an "overseas wealth tax." On October 21, the topic of "China to impose an overseas wealth tax" gained widespread attention, trending on social media. Chinese state media confirmed that the CCP introduced relevant policies years ago, laying the groundwork for taxing individuals on foreign income.

Recently, rumors about the CCP’s plan to impose an "overseas wealth tax" have sparked both domestic and international concern.

According to circulating information, the CCP intends to levy taxes on high-net-worth individuals who hold Chinese citizenship, with a threshold of $10 million in assets. Shareholders of overseas-listed companies would also be affected.

A Bloomberg report on October 15 indicated that as the CCP enforces foreign investment regulations, wealthy individuals in major Chinese cities could face tax bills as high as 20% on overseas investment income.

"Yicai Global" recently reported that China has long had policies in place for "global taxation."

In March of this year, the Office of the State Taxation Administration issued a notice emphasizing that overseas income must be declared, warning against hiding income and taking risks. The notice clarified that residents must self-report and pay taxes on their overseas income. The Individual Income Tax Law stipulates that residents are required to pay income tax on both domestic and foreign income.

The Individual Income Tax Law explicitly includes "income earned overseas" as taxable, requiring residents to declare and pay taxes between March 1 and June 30 of the following year.

Xiao Sa, a senior partner at the Beijing Dacheng Law Firm, told Chinese media that regulations introduced in 2020 laid the institutional groundwork for taxing foreign income. In the past, enforcement was lenient, likely due to concerns over economic growth and preventing capital flight.

Xiao Sa noted that when Announcement No. 3 was introduced in 2020, it attracted significant attention. The current rumors have once again drawn focus because if the policy is strictly enforced, it will significantly impact high-net-worth individuals with overseas assets.

Announcement No. 3 provides detailed guidelines on foreign income, taxable amounts, tax credits and limits, tax exemptions or reductions, and the reporting process.

The introduction of this policy by the CCP highlights the government's urgent need to expand revenue sources amid declining land sales and slowing economic growth. Professor Sun Guoxiang from the Department of International Affairs and Business at Nanhua University in Taiwan told Epoch Times that the main reasons behind this measure can be summarized as follows:

  1. China’s Need for More Fiscal Revenue: As China's economic growth slows, local government debt rises, and public spending increases, the government is compelled to find new sources of income. Imposing an overseas wealth tax allows the government to collect more taxes from high-net-worth individuals who hold substantial overseas assets or income, thereby boosting national fiscal revenue.

    Sun Guoxiang further analyzed that the CCP’s policies, particularly those related to economic distribution and fiscal collection, theoretically emphasize concepts like "common prosperity." However, in practice, policy implementation often leans towards maintaining regime stability or addressing the government's fiscal pressures. For example, by increasing taxes or implementing other collection measures, the government can strengthen its fiscal revenues to address local debts or invest in infrastructure projects.

  2. Preventing Capital Flight: In recent years, China has experienced significant capital outflows, with many wealthy individuals transferring their assets overseas to avoid domestic taxes and policy risks. By imposing an "overseas wealth tax," the CCP aims to reduce capital flight and encourage wealthy individuals to keep their funds within China for investment purposes.

According to reports, many tax experts believe that taxing foreign income for taxable residents is an inevitable trend, and that the CCP's implementation is merely a matter of time. Xiao Sa noted that if the CCP enforces these tax policies more strictly in the future, it will need to consider potential tax avoidance strategies by residents, such as changing nationalities or transferring assets abroad.

The six-year "exemption period" for individuals without residence in China is approaching its expiration.

For individuals without a residence in China, a six-year "exemption period" has been in place since 2019, and the first expiration date is approaching.

According to the revised Implementation Regulations of China’s Individual Income Tax Law (referred to as the Implementation Regulations), individuals without residence in China are granted certain tax exemptions on foreign income. Specifically, individuals who reside in China for a total of 183 days per year but for fewer than six consecutive years can apply for an exemption on foreign income that is paid by foreign entities or individuals, as long as they file the necessary paperwork with tax authorities. If, during any given year, they leave China for more than 30 days, the six-year exemption period resets. These regulations have been in effect since January 1, 2019.

A case reported by the State Taxation Administration revealed that a Chinese employee, Xiao He, was sent by a domestic company to work at an overseas subsidiary for three years. Every year by the end of February, the company reported its expatriate employee information to the tax authorities. During the annual tax filing, the company reminded Xiao He to declare his foreign income for domestic tax purposes, but he failed to do so. Through big data analysis, the tax authorities discovered that Xiao He had undeclared foreign income worth hundreds of thousands of yuan. As a result, the authorities issued a notice requiring him to rectify the issue within a specific timeframe, and Xiao He subsequently paid the overdue taxes and fines.

According to the Judgment Criteria, the determination of residency time for individuals without a residence in China is crucial, particularly regarding the six-year period and the continuity of their stay. The regulation has been in effect since January 1, 2019.

This means that from 2019 onwards, if a non-resident individual has lived in China for 183 days or more each year for six consecutive years without leaving the country for more than 30 days at any point, they will be required to pay taxes on foreign income starting from the seventh year. However, if this condition is disrupted during any year within the six-year period, the individual will continue to be exempt from foreign income tax in the seventh year.

Will the CCP’s Overseas Wealth Tax Benefit Ordinary Citizens?

Professor Sun Guoxiang from Taiwan’s Nanhua University explained that the CCP has recently emphasized its "common prosperity" policy, claiming to reduce the wealth gap. Taxing wealthy individuals with large overseas assets aligns with the CCP’s rhetoric aimed at appealing to the middle and lower classes.

However, Sun raised a critical point: whether the collected taxes from overseas wealthy individuals will be used to benefit the general population remains uncertain.

Sun pointed out that there are often imbalances in how the CCP allocates resources for infrastructure and social security. For example, a significant portion of fiscal resources is concentrated in urban areas or used for large local government projects, rather than directly improving the living standards of lower-income citizens. Therefore, the general public may not necessarily benefit from the overseas wealth tax due to a lack of transparency in resource allocation and inconsistent policy implementation by the CCP.

Editor: Gao Jing