Recently, at the invitation of "China Foreign Exchange", the article "Tax Compliance of High Net Worth Individuals under the Transparency of Global Tax Information" written by Liu Tianyong, Director of Hwuason Law Firm and Director of the Financial and Tax Law Professional Committee of the All-China Lawyers Association, was published in the journal. "China Foreign Exchange" was founded in 1993. It is a Chinese bi-monthly publication supervised by the State Administration of Foreign Exchange and hosted by the Foreign Exchange Research Center of the State Administration of Foreign Exchange. In 2003, "China Foreign Exchange" was rated as one of the "Top 100 Key Journals of the Second National Journal Award" by the former General Administration of Press and Publication, and in 2005, it was rated as one of the "Top 100 Key Journals of the Third National Journal Award" by the former General Administration of Press and Publication. In 2017, it was rated as one of the third "Top 100 Newspapers and Periodicals" in China by the former State Administration of Press, Publication, Radio, Film, and Television. In March 2023, it was rated as a core journal for the "2022 Chinese Humanities and Social Sciences Journals AMI Comprehensive Evaluation" by the China Academy of Social Sciences Evaluation.

The specific content of the article is as follows:

Tax compliance for high net worth individuals under global tax transparency

The transparency of global tax information has made cross-border tax evasion and tax avoidance nowhere to hide. High-net-worth individuals should strengthen their awareness of tax compliance, manage tax compliance, and assume tax obligations in accordance with the law in order to better preserve and inherit wealth.

By Liu Tianyong

High net worth individuals refer to individuals whose wealth or income reaches a certain threshold. According to the report "Promoting Tax Compliance for High Net Worth Individuals" released by the Organization for Economic Cooperation and Development (OECD) in September 2009, The high net worth threshold is usually set to directly or indirectly hold more than $1 million in financial assets, investable assets, or other Control assets. Studies have shown that the tax burdens borne by high net worth individuals do not match their wealth.Yagan (2023) found that the average federal income tax rate borne by the 400 richest households in the United States is only 9.6%.Alstadsæter（2024）also included consumption tax, corporate tax, property tax, etc. in the calculation of effective tax rates, and found that the effective tax rates for billionaires in the United States, the Netherlands, and France are below 30%, lower than any other lower-income group.

This phenomenon is closely related to tax evasion and tax avoidance non-separable, the information between tax authorities and taxpayers does not provide conditions for tax evasion and tax avoidance. With the development of economic globalization, more high net worth individuals choose to allocate assets between different jurisdictions, and the cost of obtaining tax information for tax authorities has significantly increased. To combat cross-border tax evasion and tax avoidance,The OECD has long been committed to promoting global tax cooperation and has made many efforts to improve tax transparency and strengthen tax information exchange, and has made significant breakthroughs in the past two decades. Nowadays, intelligence exchange tools mainly based on the automatic exchange standards of financial account tax-related information are becoming more mature. In the current highly transparent global tax information, high-net-worth individuals urgently need to reconsider asset allocation and layout and strengthen tax compliance.

Development and current situation of global tax information transparency

Tax transparency standards and information exchange on request

In May 2002, the OECD released the Model Tax Information Exchange Agreement (hereinafter referred to as the "Model"), which provides specific standards for tax transparency and information exchange (tax transparency standards). The basic content of the tax transparency standard is that the requesting State applies to the requested State for the exchange of tax information that is "foreseeable relevant" to the purpose of the tax investigation and that the competent authorities of the requested State have the right to request such information in accordance with the law and that the request does not exceed the tax time limit, the competent authorities of the requested State shall assist in obtaining the relevant tax information. And exchange with the competent authorities of the requesting State, which is an exchange of information upon request (EOIR). In November 2004, the G20 finance ministers and central bank governors jointly issued a statement promising to implement the Model. In July 2005, the OECD revised and released the bilateral tax treaty model, which changed the two provisions of Article 26 on the exchange of tax information to "new five" and incorporated the tax transparency standards. In 2008,after the outbreak of the international financial crisis , the international community's demand for cracking down on cross-border tax evasion and tax avoidance has become stronger. The United Nations bilateral tax agreement model has also introduced tax transparency standards, making it an international standard. Since 2008, China has basically used the "new five articles" for the exchange of tax information in the bilateral tax agreements signed by China. Since 2009, China has signed a tax information exchange agreement with ten jurisdictions including Bahamas to implement tax transparency standards for these internationally renowned "tax havens." At this stage, tax transparency standards are mainly operated in bilateral agreements.

Multilateral Convention on Mutual Assistance in Tax Administration and Automatic Information Exchange

Back in 1988,The OECD has issued the "Mlateral Convention on Mutual Assistance in Tax Collection and Administration" (hereinafter referred to as the "Convention"), proposing five paths for obtaining tax intelligence: information exchange upon request, automatic information exchange, spontaneous information exchange, simultaneous tax inspections, and overseas tax inspections. Among them, the automatic exchange of information (AEOI) refers to the regular, batch, and automatic exchange of a large amount of tax information related to fund payments, tax withholding, etc. by the competent authorities of one contracting party to the competent authorities of the other contracting party. As the AEOI and other mechanisms were advanced at the time, only 14 countries had signed and implemented the Convention by 2010.

After the tax transparency standard was widely accepted,in March 2010, the OECD revised the content of the Convention to make it more in line with the standards, and clearly stated that non-OECD member countries can also join with the consensus of the contracting parties, allowing them to return to the international negotiation perspective. The strong advantages of multilateralism in terms of efficiency in treaty-making allowed the Convention to quickly replace bilateral tax information exchange agreements. In April 2013,G20 Finance Minister and Central Bank Governor have recognized AEOI as a new international standard. China signed the Convention in August 2013, approved by the Standing Committee of the National People's Congress in July 2015, and implemented in 2017.

Standard for automatic exchange of financial account information and uniform reporting

In July 2014,The OECD has released the "Standard for the Automatic Exchange of Tax-related Information on Financial Accounts" (hereinafter referred to as the "Standard"), forming the first operational AEOI tool. The "Standard" consists of two parts: the Model Agreement between Competent Authorities (CAA) and the Uniform Reporting Standard (CRS). The CAA is the blueprint for the competent authority.CRS is a specific execution standard that regulates the procedures and requirements for financial institutions to collect and submit financial account information, and constitutes the due diligence criteria for financial institutions.

The exchange of the Standard includes personal account information, and the specific exchange procedure is that the reporting financial institution of the State Party identifies the financial accounts opened by non-tax resident individuals with the institution in accordance with the due diligence guidelines and submits the account information to the competent authorities of the tax jurisdiction on an annual basis. The exchange of information between the competent authorities and the tax authorities of the account holder's country of residence is then carried out to support the regulation of the tax sources in the country of residence. According to the CRS,the reporting financial institutions include deposit-taking institutions, custodians, investment entities, and specific insurance companies. Reportable financial accounts include deposit accounts, escrow accounts, equity or debt interests held by investment entities, cash value insurance contracts issued or maintained by financial institutions, and annuity contracts. Reportable account information includes the account holder's name, address, (tax) residence jurisdiction, tax number, date and place of birth, account number, balance, as well as dividends, interest, income from sale and redemption of financial assets and other income earned during the reporting period.The CRS also defines accounts with accumulated balances or values of more than $1 million as high net worth accounts, and low net worth accounts are also included in the exchange, but the process can be simplified.

According to the "Automated Exchange of Financial Account Information Peer Review (2024)" published by the OECD, as of November 25, 2024, competent authorities from 111 jurisdictions have automatically exchanged financial account information. In 2023, information on more than 134 million financial accounts was automatically exchanged, covering nearly 12 trillion euros in total assets. Jurisdictions have recovered more than 130 billion euros in taxes, interest and fines through voluntary disclosure programs and other offshore tax compliance initiatives.

Impact of CRS domestic practice on high net worth individuals

The specific application of CRS in China

In December 2015, with the approval of the State Council, the State Administration of Taxation signed the "Agreement between Multilateral Competent Authorities for Automatic Exchange of Tax-related Information on Financial Accounts." In September 2018, the State Administration of Taxation completed the first information exchange with the competent authorities of other jurisdictions. In recent years, influenced by the international political environment and domestic economic situation, the utilization of information exchange from overseas has improved significantly. The second half of 2024, some ultra-high net worth individuals with offshore assets exceeding $10 million in China received a notice of interview from the tax authorities. On March 25th and 26^th，2025, the tax authorities in Hubei, Shandong, Shanghai, and Zhejiang issued announcements stating that four resident individuals had not declared and paid taxes on overseas income, and had to pay taxes ranging from 127,200 to 1.413 million yuan. Since April 2025, some domestic individuals who have opened financial accounts for stock trading in Hong Kong securities firms have received risk warnings from tax authorities in various regions, requiring them to self-inspect and pay taxes. Many of these individuals have funds in their overseas accounts below $1 million, indicating that low-net-worth account information has also begun to be widely used.

Impact on cross-border asset allocation

Since the primary exchange object of AEOI is financial accounts, the most obvious phenomenon after the conversion of CRS into domestic law is that banks begin to lose confidentiality.O'Reilly (2019) research found that since 2000, banking institutions in the International Financial Center (IFC) have significantly increased the scale of deposits from non-bank counterparties, reaching a peak of $1.7 trillion in the second quarter of 2008. After the outbreak of the international financial crisis, from the second quarter of 2008 to the first quarter of 2019, the amount of such deposits decreased by $410 billion, a decrease of about 24%. Taking into account the impact of the financial crisis in Q2 2011, the first segment is from Q2 2008 to Q2 2011, and such deposits decreased by 13%. The second segment is from then to the first quarter of 2019, with a further decrease of 11%. The decrease in deposits in the second segment is closely related to the practice of tax transparency standards and the implementation of AEOI. It can be seen that AEOI has two direct effects on high net worth individuals. One is to prompt them to adjust the types of assets they hold and convert account deposits into other types of assets, such as real estate. The second is the large-scale transfer of assets, transferring account funds from jurisdictions that have fully implemented AEOI instruments to countries and regions with lower tax transparency, including jurisdictions that have not committed to implementing AEOI and jurisdictions that have committed but have not fulfilled their obligations. Neither of these measures is clearly a long-term solution. In terms of asset conversion, since the objects of CRS exchange include existing accounts and new accounts, even if the funds in existing accounts have been used to purchase assets, the relevant information is still within the scope of the exchange. In terms of asset transfers, as international tax havens are constantly being eroded, the range of transfer destinations will become smaller and smaller.In April 2025, with the accession of Cote d'Ivoire, 150 jurisdictions have signed the convention. Taking the EU as an example, in December 2017, the Council of the European Union adopted a list of EU tax non-cooperation jurisdictions, aiming to put pressure on jurisdictions that do not implement tax transparency standards. The list is reviewed and updated every six months, playing an important role in promoting international tax transparency. For jurisdictions that have committed to implementing AEOI, as they need to undergo annual peer review at the OECD Global Forum AEOI, if their performance is not in place, rectification will inevitably be necessary.

Tax law risks faced by high net worth individuals

Although CRS effectively solves the problem of information asymmetry between tax authorities and taxpayers, its analysis and judgment of information exchanged from overseas may lead to the following tax risks for high-net-worth individuals.

The first is the administrative legal risk of not making tax declaration. According to Article 1 and Article 10 of the "Individual Income Tax Law of the People's Republic of China" (hereinafter referred to as the "Individual Income Tax Law"), resident individuals who obtain overseas income should declare and pay personal income tax in China. According to Article 64 of the "Tax Collection and Administration Law of the People's Republic of China" (hereinafter referred to as the "Tax Collection and Administration Law"), if taxpayers obtain overseas taxable income without tax declaration, resulting in underpayment of taxes, the tax authorities may recover the taxes and late fees. The penalty may be between 0.5 and 5 times the fine.

The second is the tax adjustment risk of transferring property at a low price to overseas related enterprises. According to Article 8 of the "Individual Income Tax Law", if an individual transfers property at a low price to a related party overseas, which does not comply with the principle of independent transactions and has no legitimate reason, the tax authorities have the right to adjust the taxable income, recover taxes, and charge interest. For example, in the April 22, 2025 edition of "China Taxation News", a case was disclosed. In October 2024, a shareholder of Company M in China transferred the equity of Company M to Company G in Hong Kong, China for a consideration of 204 million yuan. Just one month later,The shareholders of Company G will transfer the equity of Company G to Company H in Hong Kong for a consideration of 440 million yuan. The tax authorities found that,Company M is associated with Company G.The transfer of the equity of Company M to Company G for 204 million yuan by the shareholders of Company M does not comply with the principle of independent transactions. The market fair price of the second transfer of Company G's equity of 440 million yuan should be used to determine the taxable income from the transfer of equity by the shareholders of Company M. More than 49 million yuan in personal income tax and interest were recovered.

Third, the risk of long-term non-dividend tax adjustment of overseas enterprises holding shares. According to Article 8 of the Individual Income Tax Law, the tax authorities have the right to adjust the taxable income if the resident individual Control is established in a jurisdiction with a significantly lower tax burden. Recover taxes and add interest. This rule is derived from the controlled foreign companies rule (CFC) in the corporate income tax law. The former Jiangsu Provincial Local Taxation Bureau disclosed a case on May 4, 2016, in which Chinese resident A registered and established Company D in British Virgin, and held equity in Company H, a listed company on the Hong Kong Stock Exchange through Company C in the Cayman Islands. In 2011,Company H paid a dividend of 22 million yuan to Company D through Company C. A insists that the dividends are still undistributed in the accounts of Company D. At that time, there were no CFC rules in the individual income tax law, which prevented the tax authorities from conducting special tax adjustments. In order to deal with such cases in practice and provide sufficient legal basis for tax adjustment, the CFC rules were introduced when the Personal Income Tax Law was revised in 2018.

The fourth is the risk of unreasonable transaction arrangements being penetrated and taxed. According to Article 8 of the "Individual Income Tax Law", if an individual implements arrangements without reasonable commercial purposes and obtains improper tax benefits, the tax authorities have the right to adjust the taxable income, recover taxes, and charge interest. This provision has the nature of a safety net. For those who achieve tax avoidance effects through offshore trusts and other structures, there is a risk of being taxed through penetration.

Fifth, the risk of stock trading losses not being deducted before tax. According to China's personal income tax policy, the transfer price difference income obtained from buying and selling stocks of domestic listed companies and companies listed on the New Third Board, buying and selling stocks listed on the Hong Kong Stock Exchange through the Shanghai-Hong Kong Stock Connect and the Shenzhen-Hong Kong Stock Connect, and buying and selling Hong Kong fund shares through mutual recognition of funds are temporarily exempt from personal income tax. In addition, income obtained from the transfer of stocks and equity by individual tax residents, such as income generated from buying and selling overseas stocks through overseas securities firms, should be declared and taxed in China according to the income from property transfer. Income from property transfer is usually taxed on a per-time basis. This means that the gains and losses of buying and selling stocks cannot be offset against each other. Profits generated from a single transaction need to be fully declared and taxed, and losses generated from a single transaction cannot be used for pre-tax deductions in other transactions.

The sixth is the risk of double taxation caused by mixed mismatch. Mixed mismatch refers to the phenomenon of inconsistency in tax laws between different jurisdictions, which may result in double taxation. For example, if a natural person goes to country A for exchange and study, because his residence is in China, he is a tax resident of China. During this period, he or she has a tax obligation in China for income obtained from China. At the same time, because he has resided in country A for more than 183 days, according to the tax laws of country A, he constitutes a tax resident of country A and forms a dual tax resident status. Therefore, he needs to pay taxes in country A on his income from China. According to the Chinese tax law, only overseas income can be tax deducted. If China and country A have not signed a bilateral tax agreement,The domestic law of country A also does not allow tax credits, which will result in double taxation.

How to manage tax compliance for high net worth individuals

Clarifying tax resident status

According to international practice, the tax resident country usually exercises global tax authority over its tax residents, while the tax authority of the source country is often limited, and it can only be taxed on the income derived from it. Therefore, the determination of tax resident status is directly related to the division of tax authority. Due to the different criteria for determining tax resident status, it is necessary to fully study the relevant national laws and regulations, especially to avoid the phenomenon of double tax resident. For those who change their tax residency status due to moving abroad, it is also necessary to pay full attention to the "abandonment tax". According to Article 13 of the "Individual Income Tax Law", for those who cancel their Chinese household registration, they should handle tax settlement before canceling their Chinese household registration.

Correctly determine the properties of the results

Different types of income have different applicable tax rates, tax calculation methods, and declaration procedures, and there may be significant differences in tax obligations. At the same time, because the boundaries of some incomes are relatively vague, it is easy to cause tax disputes, which need special attention. For example, the income generated from providing independent personal services such as medical care and lectures abroad may be classified as labor remuneration income or business income. The former is subject to a tax rate of 3% to 45%, and can only be deducted at the statutory proportion during tax calculation, and the comprehensive income is settled and paid. The latter is subject to a tax rate of 5% to 35%, and the actual costs and expenses can be deducted when calculating taxes, and the operating income can be declared by oneself.

Make a true tax declaration

Tax payment is the legal obligation of citizens. Tax residents who obtain overseas income should truthfully declare taxes, emphasizing not only the timeliness of the declaration but also the objectivity and authenticity of the declaration. For those who fail to make tax declarations in a timely manner, they may face administrative and legal risks of non-declaration. For those who have made tax declarations but have not made tax declarations objectively and truthfully, forged or fabricated tax information, concealed or decomposed income, falsely reported expenses, and fabricated false tax basis, Changing the nature of income and fraudulently obtaining tax benefits constitute tax evasion behavior of false tax declaration, which not only faces administrative legal risks but also may face criminal legal risks of tax evasion.

Tax credits declared in accordance with the law

According to Article 7 of the "Individual Income Tax Law", tax residents who obtain overseas income can offset the personal income tax already paid overseas from their domestic tax payable, but it must not exceed the prescribed limit. When applying for tax credits, attention should also be paid to bilateral tax agreements. In some agreements, China provides more favorable measures such as concessional credits. Taking the bilateral tax agreement signed between China and Rwanda as an example, if a tax resident of China obtains income from Rwanda, the income is originally within the scope of taxation in Rwanda, but due to the consideration of promoting economic development, the tax reduction and exemption amount is considered to have been paid in Rwanda. Tax credits can still be claimed in China.

Effective use of tax recovery period defense

According to Article 52 of the "Tax Collection and Administration Law" and Article 82 of the "Implementation Rules of the Tax Collection and Administration Law of the People's Republic of China", if taxpayers fail to pay or underpay taxes due to calculation errors or other errors, the tax authorities can recover the taxes and late fees within three years. If the tax underpaid is more than 100,000 yuan, the recovery period can be extended to five years. According to the "Reply of the State Administration of Taxation on the Issue of Undeclared Tax Recovery Period" (National Tax Letter [2009] No. 326), if taxpayers fail to declare taxes and result in non-payment or underpayment of taxes, the above-mentioned recovery period can be applied. Therefore, if a tax resident individual fails to make tax declarations and fails to pay taxes, if the interval between the expiration date of the tax declaration deadline and the date of the interview or case inspection by the tax authorities exceeds the tax collection period, they can defend themselves in accordance with the law. It should be noted that if it is classified as tax evasion, the provisions of the tax recovery period will not apply.

Resolve tax disputes in the early stage

In the four cases of tax payment on overseas income issued on March 25 and 26, 2025 ,the tax authorities applied the "five-step working method" to collect taxes. The so-called "five-step work method" includes reminders, urging rectification, interviewing and warning, filing and inspection, and public exposure. After the tax authorities discover clues of tax avoidance or tax evasion on overseas income, they usually do not directly adopt the rigid law enforcement procedures of filing and inspection. Instead, they first adopt flexible law enforcement methods such as prompting, urging, and interviewing to avoid excessive escalation of conflicts with taxpayers. For high-net-worth individuals, flexible law enforcement is an opportunity for self-examination and tax payment. If they seize the opportunity to resolve tax disputes in the early stage, the main risks they face are the payment of taxes, as well as late fees or tax adjustment interest. If an agreement is not reached with the tax authorities in the early stage, leading to the case entering the next procedure, it may face administrative fines or even criminal risks. The transparency of global tax information has made cross-border tax evasion and tax avoidance nowhere to hide. High net worth individuals should strengthen their awareness of tax compliance, manage tax compliance well, and assume tax obligations in accordance with the law. If tax evasion occurs due to misunderstandings of tax laws, they should actively communicate with tax authorities. Accept tax guidance and make rectifications in accordance with the law. Only by complying with tax regulations can wealth be better preserved and inherited.

Author's Unit: Hwuason Law Firm

(This article was published in the 14th issue of "China Foreign Exchange" in 2025. The author is the director of Beijing Hwuason Law Firm and the director of the Financial and Tax Law Professional Committee of the All-China Lawyers Association.)