Author: FinTax

News Overview

From March 25 to 26, 2025, tax authorities in Hubei, Shandong, Shanghai, and Zhejiang provinces of China simultaneously issued announcements within 48 hours, launching a concentrated review of the declaration of overseas income for residents within China. In September 2014, China officially committed to implementing the Automatic Exchange of Information (AEOI) standard under the Common Reporting Standard (CRS) framework, and in September 2018, it completed its first information exchange with other CRS participating countries (regions), covering major countries such as the UK, France, Germany, Switzerland, Singapore, as well as traditional tax havens like the Cayman Islands, British Virgin Islands (BVI), and Bermuda, including core data such as account balances and investment income. This time, the tax departments in the four regions of China identified multiple typical cases, with recovery amounts ranging from 127,200 yuan to 1,263,800 yuan, and adopted a five-step work method of "prompt reminders, urging rectification, interviews and warnings, case investigations, and public exposure" to promote rectification.

FinTax Brief Commentary

1. Interpretation of Announcement Characteristics

This tax review presents two distinct characteristics. The first characteristic is the expansion of the review targets for overseas income, now focusing on the middle-class group. Unlike previous efforts that primarily monitored the overseas income of high-net-worth individuals, this review targets taxpayers with asset scales and income levels that fall within the upper-middle-income range. For example, in a typical case published by the Zhejiang tax department, the amount of tax owed was 127,200 yuan. This shift indicates that tax authorities in mainland China have begun to pay attention to the overseas income of the middle-income group.

The second characteristic is the collaborative and complementary scope of the review by the four regional tax departments. On one hand, the cross-border flow of private capital in Zhejiang, offshore financial transactions in Shanghai, traditional manufacturing going abroad in Shandong, and new manufacturing in Hubei essentially cover the mainstream scenarios of overseas income for the middle class. On the other hand, the simultaneous release of review announcements by multiple regions may imply a higher-level unified directive, indicating that the previous practice of individuals "voluntarily declaring" overseas income will gradually shift to strict substantive audits by tax authorities regarding overseas income.

2. How Does Mainland China Tax Residents' Overseas Income?

China implements a global taxation principle for tax resident individuals, a principle established since the introduction of the "Interim Measures for the Collection and Management of Individual Income Tax on Overseas Income" in 1998, which has been in use ever since. In early 2020, the Ministry of Finance and the State Administration of Taxation issued the "Announcement on Individual Income Tax Policies Related to Overseas Income" (Announcement No. 3 of 2020 by the Ministry of Finance and the State Administration of Taxation), which further clarified the tax treatment and collection management of overseas income for Chinese residents. The foundation of the global taxation principle lies in maintaining national tax sovereignty and achieving social equity. Based on this principle, the requirements for taxing residents' overseas income in mainland China are roughly as follows:

For taxpayers, according to the "Individual Income Tax Law of the People's Republic of China," individuals meeting any of the following conditions are recognized as "Chinese tax residents": 1. Having a domicile in China: Refers to individuals who habitually reside in China due to household registration, family, or economic interests, and even if they work or live abroad for a long time, as long as they have not given up their household registration or family ties, they may still be recognized as residents. 2. Residing in China for 183 days or more: Individuals who accumulate 183 days of residence in a tax year (January 1 - December 31) are considered residents, even if they do not have a domicile.

Regarding the scope of taxable income, residents must declare and pay individual income tax on all income obtained from both within and outside China according to the Chinese individual income tax law. However, if an individual without a domicile resides in China for 183 days or more in a tax year, but has not accumulated 183 days of residence in any of the previous six years or has a single departure exceeding 30 days, the income sourced from outside China and paid by foreign entities or individuals for that tax year is exempt from individual income tax.

According to Chinese tax law, Chinese tax residents are required to pay taxes on global income, which includes income from US and Hong Kong stocks. The income obtained by investors from the stock market mainly consists of two types: dividends and distributions from stocks (dividend income) and profits from buying and selling stocks (which fall under capital gains; however, China does not separately establish a capital gains tax, and it is classified under "income from property transfer").

For US stock dividend income, Chinese investors must include US stock dividends in their comprehensive income and pay individual income tax at a rate of 20%. According to Announcement No. 3 of 2020 by the State Administration of Taxation, taxpayers can enjoy a credit based on the taxes paid in the US (mainly the withholding tax imposed by the US). Therefore, Chinese tax residents must include the full amount of US stock dividends in their income, and after deducting the taxes already paid abroad, calculate the taxable amount according to Chinese tax rates. The specific calculation formula is: Chinese taxable amount = dividend income × Chinese tax rate − taxes paid abroad (within the credit limit). For capital gains from US stocks, Chinese investors pay individual income tax at a rate of 20% on income from property transfer, where eligible foreign investment losses can be deducted before tax, and taxes already paid abroad can also be claimed for tax credits.

For Hong Kong stock dividend income, Chinese residents can invest in Hong Kong stocks through either the Hong Kong Stock Connect account or a Hong Kong account. According to the "Notice on Tax Policies Related to the Pilot Mechanism for Mutual Stock Market Trading between Shanghai and Hong Kong," H shares dividends obtained by mainland individual investors are subject to a 20% withholding tax by H share companies, while non-H share dividends are withheld at a 20% rate by China Securities Depository and Clearing Corporation Limited. For red-chip stocks of companies that are primarily controlled or operate in mainland China but are listed in Hong Kong, according to the "Corporate Income Tax Law" and its implementation regulations, red-chip companies withhold 10% corporate income tax before distributing dividends. However, not all of the red-chip companies' after-tax profits are subject to the 10% corporate income tax, so the individual income tax rate for Hong Kong stock investors ranges from 20% to 28%. Additionally, if investors directly open a securities account in Hong Kong for stock investment, they are generally not required to withhold individual income tax on dividends received, except for H shares and certain red-chip cases where a 10% dividend tax is applicable.

For capital gains from Hong Kong stocks, the tax treatment in mainland China also distinguishes between two scenarios: first, profits from trading through the Hong Kong Stock Connect account are exempt from individual income tax in mainland China; second, profits from directly transferring shares of Hong Kong-listed companies through a Hong Kong securities account must be reported to the tax authorities in mainland China as overseas income. Moreover, Hong Kong does not impose capital gains tax on the price differences obtained by overseas investors from trading Hong Kong stocks, thus no tax credit is generated in mainland China, and investors must pay individual income tax at a rate of 20% on income from property transfer.

In recent years, the State Administration of Taxation of China has placed great emphasis on the issue of tax evasion by high-net-worth individuals, with dedicated personnel responsible for monitoring significant fund movements and identifying individual tax risk points. Income from overseas investments, such as US stocks, is also within the monitoring scope. However, income from overseas stock trading is primarily calculated through self-declaration, and Chinese tax authorities cannot directly implement supervision through withholding mechanisms.

The CRS (Common Reporting Standard) mechanism is one of the methods for Chinese tax authorities to obtain tax-related information for tax audits. CRS is an automatic exchange standard for financial account tax information led by the Organization for Economic Cooperation and Development (OECD), which establishes a system for exchanging account information of taxpayers among member countries to combat tax evasion. China has implemented this mechanism since 2017, allowing tax authorities to automatically obtain account information of Chinese tax residents from foreign financial institutions, including data on deposits, investments, insurance, and other financial assets. As of 2025, 106 countries and regions have joined CRS (including mainland China and Hong Kong), and the information exchange covers account balances, interest, dividends, and more. CRS itself does not set a global minimum for "individual account balances" or "reportable amounts"; all accounts identified as "reportable accounts" must be reported to the competent tax authorities. However, some jurisdictions have set non-mandatory reporting thresholds in their legislation. For example, Hong Kong's "Regulations on Automatic Exchange of Financial Account Information" explicitly allows financial institutions to exempt "pre-existing entity accounts" from immediate due diligence and reporting if the account balance does not exceed $250,000, but financial institutions can also voluntarily investigate accounts below this threshold, which is fully compliant. Therefore, accounts with larger amounts are more likely to attract attention, but the possibility of small accounts' information being reported and exchanged cannot be ruled out.

Currently, the United States has not joined CRS and applies its own information exchange framework—the Foreign Account Tax Compliance Act (FATCA), which has been applicable to all countries since January 1, 2014. It requires foreign financial institutions to disclose information about US accounts to the US tax authorities, or else face taxation. There are two disclosure models: Model 1 involves foreign governments reporting information about US accounts maintained by financial institutions in their jurisdictions to the US tax authorities, while Model 2 involves financial institutions directly reporting information about US accounts they maintain to the US tax authorities. Since June 30, 2014, China has reached a substantive agreement with the US on Model 1 of FATCA and is treated as a jurisdiction with an effective intergovernmental agreement. However, as of now, the two countries have not signed a formal intergovernmental agreement regarding this cooperation. Therefore, Chinese tax authorities are temporarily unable to obtain information about tax residents' accounts in the US through information exchange mechanisms like CRS or FATCA. In contrast, information exchange between mainland China and Hong Kong through CRS is very convenient.

However, the CRS/FATCA mechanism is not the only way to obtain information. First, at the market level, brokers in mainstream securities markets such as Hong Kong and US stocks regularly report relevant transaction information to the tax authorities in mainland China, which can then analyze potential overseas income based on these reports. Second, the close cooperation between the State Administration of Taxation and other government departments such as the Financial Regulatory Bureau, Human Resources and Social Security Bureau, Customs, and Foreign Exchange Administration allows tax authorities to integrate relevant payment data, labor dispatch data, entry and exit data, and foreign payment data of Chinese residents, and comprehensively assess tax risks through the individual income tax risk control management system. In practice, these methods play a more critical role in the tax authorities' acquisition of overseas tax-related information, tax risk assessment, and audits.

3. Tax Obligations for Web3 Practitioners

Announcement No. 3 clarifies the types of taxable overseas income, which can be divided into comprehensive income sourced from outside China (salary income, labor remuneration income, manuscript income, royalty income), business income, and other income (interest, dividends, property transfer income, property rental income, incidental income). The classification standards are basically consistent with domestic income, but there are differences in tax calculation methods: for example, overseas comprehensive income and overseas business income should be combined with domestic comprehensive income and domestic business income to calculate the taxable amount, while other classified income sourced from outside China should not be combined with domestic income and should be calculated separately for the taxable amount.

The tax treatment of cryptocurrency assets in mainland China still has many points of contention. The following will illustrate a few common scenarios:

For commercial mining activities that continue to operate overseas, tax authorities may classify them as business income, allowing for the deduction of necessary costs such as equipment and electricity, which aligns with their capital-intensive and ongoing investment characteristics. However, if miners engage in mining as individuals, the tax classification becomes a dilemma: if treated as incidental income, it fits the randomness of the income but results in a disproportionately high tax burden due to the inability to deduct costs; if classified as income from property transfer, the lack of stable valuation benchmarks for crypto assets makes it difficult to reasonably determine the appreciation portion, leading to potential tax disputes.

Another common scenario is when residents of mainland China obtain income through cryptocurrency trading, where the determination of commercial substance becomes key. If there is a fixed location, a hired team, and ongoing transactions, it may be recognized as business income. High-frequency traders face the risk of being upgraded to business income, while ordinary investors typically only pay taxes on the appreciation portion but need to provide complete cost documentation to prove the original value of the property, thereby avoiding double taxation and excessively high deemed profit rates.

Since tax authorities have begun to focus on the tax regulation of overseas investment income from US and Hong Kong stocks for Chinese tax residents, whether Web3 overseas income will become the next key audit target is a matter of urgent attention. According to Chinese tax law, Web3 income falls within the scope of taxable income as long as it can be categorized under relevant tax categories in the law, which is primarily a technical issue of legal application. In practice, an important prerequisite for the successful tax collection management by tax authorities in mainland China is their ability to obtain information on Web3 income from Chinese tax residents.

Under the current framework for processing tax-related information, CRS also applies to the flow of funds related to cryptocurrencies. However, if investors do not interact on centralized platforms (especially not trading on CEX), it becomes difficult for CRS to track, and mainland tax authorities find it challenging to directly obtain relevant transaction information (though there remains a risk of being reported for tax evasion by others). Nevertheless, this does not mean that tax authorities are completely unable to detect tax violations by tax residents in the Web3 space. Just as tax authorities can assess residents' overseas securities investment situations through multiple data sources, they may also have a corresponding risk indicator system for Web3 practitioners or investors, such as examining individuals' travel patterns abroad, whether their industry is closely related to blockchain technology, and whether they hold high-value assets without activity in their fiat accounts. Additionally, with the development of the Web3 industry, it is not ruled out that Chinese tax authorities may establish closer relationships with more cryptocurrency exchanges in the future to obtain information on users' trading records and profit and loss situations. The recent repeal of the IRS's "Gross Proceeds Reporting by Brokers That Regularly Provide Services Effectuating Digital Asset Sales" indicates that, in the short term, while tax authorities in various countries may find it difficult to exert sufficient pressure on decentralized platforms, centralized platforms represented by centralized exchanges may not be so.

4. What Should Web3 Practitioners in Mainland China Pay Attention To?

In response to overdue declarations or intentional concealment of overseas income, tax authorities in mainland China have established a clear legal responsibility system. According to Articles 32 and 63 of the "Tax Collection and Administration Law," taxpayers who fail to declare on time or make false declarations will face progressive penalties, including tax recovery, accumulation of late fees, administrative penalties, and even criminal penalties: starting from the day after the statutory declaration deadline, a late fee of 0.05% of the overdue tax will be added daily, creating significant financial pressure; for confirmed tax evasion, in addition to full recovery of taxes owed, a tiered fine of 50% to five times the amount of tax owed will be imposed based on factors such as the degree of subjective malice and complexity of concealment methods; if the amount involved reaches the standard for criminal prosecution, the case will be referred to judicial authorities for criminal liability.

In the context of global tax transparency and regulatory technology upgrades, the tax issues related to cross-border income from crypto assets deserve more attention. Currently, Chinese tax authorities have achieved in-depth regulation of core data such as overseas account balances and investment income through means such as CRS information exchange. Web3 practitioners may consider making reasonable tax arrangements and declaring taxes truthfully. Particularly, based on several disclosed cases, the costs of late fees and penalties for subsequent payments far exceed the original taxes owed. Specifically, Web3 practitioners in mainland China can take two approaches to mitigate risks: first, they can independently or with the help of professionals review their past overseas income situations, determine whether taxable income has been generated, and take remedial measures; second, they can continuously adjust and update their tax arrangements to minimize their tax burden while complying with relevant laws and regulations.

As global tax transparency increases and regulatory technology upgrades, Chinese tax authorities are also intensifying their efforts in auditing overseas income taxes. In the long run, compliance may be the choice that aligns better with long-term interests. For investors in US stocks, Hong Kong stocks, and Web3, it is necessary to reassess the compliance logic of cross-border assets and strengthen attention to the declaration of cross-border income issues.

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