China tightens tax collection on offshore personal income

Tax residency in China and worldwide income obligations

According to the Chinese Individual Income Tax (“IIT”) Law, resident taxpayers are obliged to pay Chinese IIT on both their domestic and offshore personal income. International tax crediting policies aim to avoid double taxation on offshore income. Also the so-called “six-year-rule” exempts tax on certain portion of personal income for qualified individuals. But it is still a statutory obligation for eligible individual taxpayers to disclose their worldwide income to the Chinese tax authority.

CRS data exchange triggers increased tax scrutiny

China participates in the Common Reporting Standard (“CRS”). The first round of automatic exchange of financial account information among countries occurred in 2018 for 2017 income information. This includes an individuals’ overseas investment income, capital gains, employment and service income, and other income like rental or royalty income. The mechanism has been a key source of information for the Chinese tax authorities. The reminders mentioned above are likely triggered by the exchanged financial information under the CRS.

Affected tax years and statutory tracing periods

As far as we are aware, individual taxpayers were specifically reminded to report their offshore personal income derived from 2022 to 2024 (not fully back to 2017). This is likely because the tracing period for underpaid taxes other than intentional tax evasion or tax fraud, is normally 3 years. But the exact 3-year period is subject to detailed definitions concerning the foreign countries’ tax years where the offshore income is derived from.

Risk of intentional tax evasion if filing reminders are ignored

Good to know: If the tax authority has notified an individual to perform a tax filing – but does not, such behaviour is deemed as intentional tax evasion. Such tax evasion is not subject to the 3 years’ tracing period and can be traced without time limit. The reminders might be interpreted as respective notification by the tax authorities.

Immediate action recommended for undeclared offshore income

In case an individual has received a reminder and has undeclared offshore income, immediate action in China is strongly recommended. It is then important to scrutinize the offshore personal income and make the required tax declarations in a compliant manner. The reminder is a strong indication that offshore income information is under the scrutiny of the tax authorities.

Review recommended even without receiving a reminder

For those who have not been notified, it is also recommended to check the offshore individual income. This includes offshore salary income or labour service income paid by an overseas company or individual such as director’s fees. In a next step, one should check if a correct declaration has already been made with the Chinese tax authorities. The tax filing status and tax payment certificates of the foreign country related to the offshore income are also important.

Complexity of tax crediting requires careful planning

Due to different tax year definitions and annual tax filing periods sometimes applied in foreign countries, the tax crediting declaration and procedures in China can be complicated. They often need careful planning by tax advisors both in China and in the income-sourcing country.

Conclusion

The recent reminders clearly show that offshore personal income has become a focus area for the Chinese tax authorities. Individuals should carefully review their global income, consolidate tax documentation and proactively address any compliance gaps to avoid delays or penalties.

Our experts are happy to assist you in analysing your worldwide income, preparing your IIT filings and coordinating communication with the Chinese tax authorities.