Frequently Asked Questions for the Personal Income Tax in 2019 (2)-Company Formation_Trademark Registration_Tax Service - Hong Kong CPA

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Taxation - China

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Frequently Asked Questions for the Personal Income Tax in 2019 (2)

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Let us talk about how high-net-worth individuals declare personal income tax.

What type of person needs to declare tax on their overseas income?

That is, "residents" are required to file taxes with China on global income (including domestic and overseas income), while "non-residents" only need to file taxes with China on domestic income.

What is a "resident"?

1）	Domicile in China ("Individual Resident");
2）	Individuals without domicile who have resided in China for a total of 183 days ("Individual without Resident") .

Are high-net-worth individuals holding various passports / green cards “residents”?

1)	Hold Chinese passport + Singapore green card + permanent residence in China? Yes, you should report tax to China on global income;
2)	Hold Chinese passport + Singapore green card + permanent residence in Singapore? Not counted, only file tax returns to China for domestic income;
3)	Hold Australian passport + Chinese reunion sign + permanent residence? Yes, you should file a tax return to China for global income; That is, regardless of the nationality green card, if it is a "resident" of the Chinese tax law, it should be "global taxation".

Is BVI company profitable, and is it necessary to file tax in 2019 to distribute profits to individuals?

Yes, tax should be declared. Individuals receive profits from BVI companies, which are "dividends originating from outside China", and they should declare and pay tax at the rate of 20%. The declaration time is March 1 to June 30, 2020.

BVI company is profitable, but the profit is not distributed to individuals, do I need to file tax?

At present, there is no need to take the initiative to declare, because the individual does not receive the distribution and has no income, so it does not trigger the tax obligation and does not need to declare, but because the individual can control the distribution time of the BVI company, it is easy to be considered as deliberate tax avoidance.

In this regard, the new tax law currently implemented specifically introduces the “controlled foreign enterprise” anti-avoidance rules. For those who have no reasonable business needs and the profits of the BVI shell company are deliberately not distributed or less distributed, the tax authority has the right to make tax adjustments. , deemed to be distributed and levied a 20% tax.

Is it necessary for individuals to transfer BVI company's equity abroad to file tax?

Yes, it is. If they are “residents”, there is income from the transfer, they should declare tax and pay tax at the rate of 20%. The declaration period is March 1 to June 30, 2020.

According to the "Announcement on Personal Income Tax Policies on Overseas Income" (Ministry of Finance Tax Administration Announcement No. 3, 2020) (7), the transfer of equity of Chinese overseas enterprises belongs to "income derived from outside China";

According to the Income Tax Law, resident individuals are subject to personal tax on income derived from within and outside China. If more than 50% of the assets held by this BVI company are real estate in China (both direct and indirect holdings are counted at the fair value of the asset), the income from the transfer of BVI company equity will be directly regarded as "derived from China Income, whether you are a "resident" individual or a "non-resident" individual, you should declare and pay Chinese personal tax at a rate of 20%.

If not to declare, how will the tax bureau review this situation?

The tax authorities will obtain overseas income through the following channels:
1)	Through the exchange of CRS information. As of February 2020, China has started automatic exchange of CRS information with more than 90 countries / jurisdictions. Information such as offshore companies and overseas insurance policies will be automatically exchanged back to China every year.
2)	Taxation agreements and taxation exchange agreements. China has signed taxation agreements (including "information exchange" clauses) and taxation information exchange agreements with almost all major countries / regions and all tax havens. If necessary, the tax bureau can request the other party to cooperate with tax inspection or investigation through agreement to obtain the desired tax information.
3)	The economic substance of tax havens. Since 2019, several offshore tax havens have issued economic substantive laws, including BVI, Cayman, Bermuda, Guernsey, Jersey, etc. If offshore companies established in these places cannot meet the economic substantive requirements (just A shell, used to collect or save money), or the local government does not monitor whether the offshore company meets the economic substantive law, then the tax haven will directly disclose the company information (including the backholder, even income and cost information, etc.) automatically exchange back to China.

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