China has begun enforcing a long-overlooked tax on overseas investment gains by the country’s ultra-rich as it seeks to expand revenue sources amid a slumping economy and declines in domestic land sales.
The government is expected to impose levies of up to 20% on wealthy individuals who have at least US$10 million in offshore assets, with some also subject to penalties for overdue tax payments.
The foreign investment tax is believed to have been on the government’s books for years but has never been enforced rigorously.
Self-assessment directive
According to sources, some of China’s wealthiest people have been directed to conduct self-assessments or be summoned by the tax authorities for meetings to evaluate potential payments.
Some of them are shareholders of companies listed in Hong Kong and the US.
Their investment gains will be taxed at up to 20% with penalties imposed on overdue payments, although the final amounts payable are open to negotiation.
In 2018, Boston Consulting Group estimated that around US$1 trillion of China’s total US$24t in personal wealth was held abroad.
Under the spotlight
China’s wealthiest nationals have been under the spotlight since President Xi Jinping unleashed a multi-year crackdown across the consumer internet, finance and property sectors.
The latest tax move underscores the growing urgency within the government to expand its sources of revenue as land sales tumble and growth slows to its lowest rate since the first quarter of 2023.
It also aligns with a national drive for “common prosperity,” which seeks to create a more equal distribution of wealth in the world’s second-largest economy.
Wealth gap
That campaign is based on a mix of policy moves, market forces and philanthropy to address the country’s significant wealth gap.
If left unchecked, this broad disparity between rich and poor could become a political threat to the ruling Communist Party.
In recent times, local officials have also become more aggressive in pursuing firms for taxes dating back decades as they try to plug a hole in municipal finances caused by the housing downturn.
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