Hefty bills, vague calculations and squads targeting individual billionaires are rattling the country’s wealthy.
In January the man in charge of China’s tax department took the stage at an annual conference in Beijing alongside a group of Communist Party officials to lay out the year’s priorities. Hu Jinglin, donning thin glasses and a military-style crew cut, began with the usual catchphrases of his country’s politics: Xi Jinping thought; socialism with Chinese characteristics; the spirit of the 20th National Congress. But this wasn’t a typical speech. Hu then promised a new era of taxation for the $21 trillion economy.
So far, he is proving to be a man of his word.
Across China, tax officials have gone into overdrive to boost receipts from the country’s richest people and biggest companies. They’ve rewritten the rules on offshore trusts, launched the biggest raid for back taxes on local companies in years and set their sights on the more than $1.7 trillion of wealth that Chinese residents hold in Hong Kong alone. Hong Kong’s Wealth Hub Is Tied to Mainland China
They’ve also formed a series of special squads dedicated to tracking and taxing the rich, with some of these units focused on just one billionaire, according to people familiar with the matter. These teams are a counterforce to the army of lawyers, tax advisers and consultants China’s megarich hire to lower their tax bills. They bring together local officials in cities or provinces, inspection experts, and even regulators, the people say.
Since China joined the World Trade Organization in December 2001, the average income of its citizens has swelled from just over $1,000 to more than $14,000 today. Hundreds of newly minted billionaires have emerged, eager to splash their cash on European art auctions, London property deals and US capital markets. Now the gravy train is being derailed, according to dozens of interviews with tax advisers, lawyers, bankers and high-net-worth investors. They asked to speak on condition of anonymity because many of the details remain private. China’s state tax department didn’t respond to requests for comment.
The country’s richest people are facing a ticking clock, having been given until late October to pay bills on their overseas trusts without facing extra charges. That’s spread fear among the wealthy, who are quickly trying to figure out how much they owe and how they can find the money to pay. Some Chinese citizens are rushing to get foreign passports, worried that Beijing will start imposing an exit tax on those moving abroad, people familiar with the matter say. Others are dumping stocks or taking out hefty loans overseas.
Shu Ping, the co-founder of hotpot chain Haidilao International Holding Ltd., for example, sold around $350 million of the company’s shares through a family trust. The move came after her family got hit with a surprise tax bill, according to people familiar with her situation. Haidilao didn’t respond to requests for comment.
A few stubborn tycoons are fighting back. Some are haggling with tax officials; others are considering legal fights if their tax bill seems unfair or unaffordable, according to a person familiar with their thinking. To circumvent local tax authorities, some wealthy Chinese are trying to play cities against one another. The controlling shareholder of a Guangzhou-based company served with a 100 million yuan ($15 million) tax bill threatened to relocate to Shanghai, ultimately persuading local officials to lower the tally to 5 million yuan, according to another person.
One wealthy family asked an adviser to help them find a small bank to hold their money, preferably one that officials in Beijing hadn’t heard of. The family thinks bigger banks like JPMorgan Chase & Co. and UBS Group AG are too high-profile, says a person familiar with the discussions. Representatives for the two banks declined to comment.
China’s tax grab comes at a time when the country’s economy is struggling under the weight of a prolonged real estate crunch, which has dealt a severe blow to the finances of local governments. Land sales, which once generated more than $1.1 trillion of revenue annually for these governments, are now forecast to hit less than a third of that.
The country is also planning to spend almost $300 billion over the next five years to build data centers, a key part of its ambition to match the US in the artificial intelligence race. That’s putting more pressure on the country’s creaky local governments to get their houses in order. “They are trying every possible channel to get more funds,” says Henry Gao, a law professor at Singapore Management University. “Everything from the lions, so to speak, to the mosquitoes.”
Jaden Zhao, 46, who owns a textile company in Guangdong, couldn’t believe what he was hearing when he received an unexpected phone call from local officials in early August. Like many of his countrymen, Zhao had used overseas brokerage accounts for years to trade stocks in international markets. These trades are officially subject to tax within China, but for years officials didn’t enforce the rules. Apparently that had changed: The officials told Zhao he owed 9 million yuan in taxes linked to trading profits.
Zhao, who says the amount is way beyond what he thinks he should owe, has pored over his trading history and hired a lawyer to help him get the records of trading accounts he’d already closed. He wants to reconstruct the numbers step by step and compare his calculations with those of the tax authorities. “Right now,” he says, “my biggest hope is that they got the numbers wrong.”
Tax officials in city or provincial departments across China have issued a raft of demands through letters and phone calls. Although some people like Zhao have been given specific numbers, others have received much vaguer messages. Instead, they’ve been asked to estimate what they think they owe, giving tax officials a starting point for negotiations, the people say.
Some analysts believe the government may even introduce an inheritance tax, bringing an end to the quirk of a Communist country — at least in name — that has for decades not taken any taxes on such wealth transfers. (In contrast, the US charges an estate tax rate of as much as 40%, generating big business for tax advisers who help rich Americans lower their bills.)
For decades, Chinese tax officials maintained a loose status quo, based as much on what was tolerated as on what the letter of the law was. For instance, China’s government limits its citizens from taking more than $50,000 out of the country each year, but tax officials didn’t appear concerned that many had millions of dollars of assets overseas. And though these citizens officially had to pay capital gains for overseas stocks, few did. “So long as they’d met their tax revenue target, they weren’t that interested in enforcing the tax law,” explains Christine Wong, a senior fellow at the National University of Singapore’s East Asian Institute. “But now they’re really short of money.”
China’s central and local governments spent $1.9 trillion more than they brought in last year, according to official data. Desperate for an alternative to their lost cash cow, they’ve turned their attention back to the wealthy. Asked whether the effort to collect taxes from wealthy individuals’ overseas investments might finally make it possible to pay salaries again, a deputy party secretary in a city in the central Henan province — who hasn’t been paid anything for a year — demurs. Given the government’s debt load, that money won’t be coming to payroll, the official says.
Some wealthy Chinese are now taking out loans backed by their overseas assets to help them pay tax bills, say people familiar with the matter. Tax loans for Chinese clients are set to become a rising source of revenue for banks like Goldman Sachs Group Inc. and JPMorgan, the people say. Representatives for the banks declined to comment. Some companies are offering loans to their founders to help them pay tax bills, according to a person familiar with their plans.
One headache for taxpayers is how to get money back inside the country, an unusual position for a generation of people who’ve focused on getting their money out. China’s annual transfer limit, designed to defend the country’s currency, applies in both directions. Chengdu, Zhuhai and other cities have created so-called green channels to help taxpayers quickly move more than $50,000 into the country to settle their bills, according to people familiar with the matter.
In May, the tax department of Shijiazhuang, a bustling city in the northern Hebei province, said it had assembled a special team to help taxpayers wire foreign currencies for tax payment. It gave the example of a “Mr. Liu,” who reportedly paid around $149,000 of taxes linked to his overseas stock trades by transferring money from a Hong Kong dollar account.
Unsurprisingly, Chinese tycoons have asked for further clarity on the rules. One gray area is the use of offshore trusts that were established before Jan. 1, 2023, a date that was explicitly mentioned in a recent rule change, but which some high-net-worth individuals worry isn’t a real cut-off. Assets transferred into trusts before that date could still be taxed, they say they fear.
Wealthy Chinese individuals are also asking tax officials how far they’re looking back, whether an annual loss could offset profits and whether a lump-sum payment could cut the bill, according to people familiar with their plans. Compliance is further stalled by missing paper trails, as many banks delete records after seven years.
The sharpest disputes center on what disgruntled taxpayers see as outdated valuation benchmarks. They’re pushing back against tax bills that appear to value their assets at peak levels, including for listed stocks that have since tumbled in value. Since there’s no standard valuation model for the tax bills, the final tally can be hammered out in private discussions, the people say.
China’s decades-long economic rise may be the greatest period of wealth creation in human history, giving a huge bonus to the world’s financial institutions. Private bankers, who spend their time wooing the world’s richest people, may benefit from a short-term boost, as their clients scramble to find the money to pay bills. A banker in Hong Kong says all his time is being spent on taxes, adding that this is the busiest summer he’s ever seen. His firm is advising clients on selling blocks of shares in their own companies or using private jets or stock portfolios as collateral to take out loans.
But the longer-term outlook is dreary. China’s tax grab could lead to as much as $100 billion being charged on assets held by wealthy people in Hong Kong, according to an extreme scenario presented by analysts at Barclays. A tax lawyer in the country estimated the haul would likely be more in the range of $15 billion to $25 billion. Whatever the numbers are, the squeeze will dent the appeal of setting up trusts overseas for the country’s richest people.
Many wealthy Chinese say they worry that submitting tax filings this year will expose sensitive information and raise questions about how they got so much money outside China, according to people familiar with their thinking. That means the tax grab could lead to a wider backlash against offshore wealth. China’s rich may have a long wait before the dust settles. Some of them who offered to pay big lump sums to settle tax bills have unofficially been asked to spread payments over five years, say people familiar with the negotiations. Local tax officials, keen to hit performance targets for years to come, are certain of one thing: They want the boon to last.