In October 2016, the State Administration of Taxation (“SAT”) released its draft Measures on the Administration and Due Diligence Procedures for Non-Residents’ Financial Accounts Information Relating to Tax Matters (“the Draft”) for public discussion. 

The Draft is a significant step to incorporate the Common Reporting Standards (“CRS”) into Chinese legislation. The CRS is a major part of the OECD’s Automatic Exchange Standards of Financial Account Information on Tax Matters (“Standards”) to reinforce global tax collaboration and increase transparency on crossborder tax information to combat tax evasion through offshore accounts. 

The OECD released the Standards, endorsed by the G20, in July 2014. With the State Council’s approval, at the G20 meeting held in September 2014, China committed to implementing them, setting September 2018 for the exchange of the first batch of information. 

Further to this commitment, the SAT has been working with the finance department over the past two years, preparing two significant steps: (i) implementing the Standards, ratified by the Multilateral Convention on Mutual Administrative Assistance in Tax Matters in July 2015, and effective in China in February 2016, and (ii) adhering to the Multilateral Competent Authority Agreement on Automatic Exchange of Financial Account Information of December 2015 (most major economies and financial centers in the world are part of it, except the United States, which insists on applying a bilateral approach by implementing its Foreign Account Tax Compliance Act).

These preparatory works provide the legal grounds for multilateral exchange of financial account information on tax matters with other countries and regions, to which the Draft is the natural subsequent step. 

The highlights:

Scope of financial accounts information

Due diligence procedures under the Draft will be applied to domestic financial institutions collecting information related to tax matters on non-residents’ financial accounts: 

a) Reporting domestic financial institutions include depository institutions, custodial institutions, investment institutions and specific insurance institutions and their branches. The Draft defines each type of institution.

b) Non-residents include individuals, companies and other organizations that are not tax residents in China, as well individual Chinese tax residents who are also tax residents in another jurisdiction.

c) Financial accounts include deposit accounts, custodial accounts, investment institutions’ interest in equity and creditor rights, insurance contracts and annuity contracts with cash value existing on December 31, 2016, and new accounts opened from January 1, 2017.

d) Non-residents’ financial accounts are those held by non-residents and by passive nonfinancial institutions effectively controlled by non-resident individuals. 

Passive non-financial institutions are holding institutions that meet any of the following conditions: 

  • more than 50% of their total income in the previous calendar year is passive income in terms of dividend, interest, royalty, rental and capital gains from the transfer of financial assets; 
  • more than 50% of their total assets at the end of the previous calendar year are financial assets that generate the above passive income; or
  • they are tax resident in a country not applying the Standards.

Also, whether a non-resident individual has effective control over a passive non-financial institution is determined by the following criteria, in this order:

  • the individual directly or indirectly has equity interest or voting rights over 25%;
  • the individual has control in other ways, such as human resources or finance; or
  • the individual is a member of senior management. 

e) Reporting information includes basic information on the account holder (e.g., name, address, tax resident country and tax number), account number, account balance at each calendar year end, and accumulated income the account receives in each calendar year.

Due diligence procedures for individual accounts

Regarding new accounts opened from January 1, 2017, reporting financial institutions will identify the tax residency status of the account holder by obtaining a signed standard statement on tax residency status and verifying the reasonableness of the statement. If identified as a non-resident account, reporting financial institutions will collect and report all necessary information. 

Regarding existing accounts:

a) if the account holder’s balance is under RMB 6 million (i.e., classified as a low net wealth individual account), reporting financial institutions will identify the tax residency status based on the account holder’s address; and

b) if the account holder’s balance exceeds RMB 6 million (i.e., classified as high net wealth individual account), reporting financial institutions will conduct record searches in both electronic and paper format, and inquire with the in-charge account manager about tax residency status.

If identified as a non-resident account, reporting financial institutions will ask the account holder for a signed statement, and collect and report the necessary information. 

Due diligence procedures for institutions' accounts

Due diligence procedures for newly opened bank accounts are similar to those applied to individuals’ accounts. 

Regarding existing bank accounts, account holders with an accumulated balance under RMB 1.5 million for all accounts in the same financial institution and those of its related parties are exempt. 

Reporting financial institutions must also identify the passive non-financial institution account holders, as the non-resident individuals controlling the account will be subject to the due diligence procedures. 

Timetable for conducting due diligence procedures  

The Draft provides the following reporting schedule:  

  • January 1, 2017: start of due diligence procedures on all newly opened accounts;
  • December 31, 2017: complete due diligence procedures on all existing high-wealth individuals’ accounts;
  • December 31, 2018: complete due diligence procedures on all existing individuals’ accounts and all existing institutions’ accounts.

China’s legal environment and foreign exchange control do not make it a target jurisdiction for international tax evasion, but by applying CRS and participating in multilateral exchange of information, the SAT will be able to collect financial information on offshore accounts of Chinese residents from foreign countries and combat domestic tax evasion. 

Although the Draft was expected to be effective January 1, 2017, the final regulation has not yet been released. However, the Chinese government has promised other countries that the final regulation will be retroactive to January 1, 2017.