Professional Interpretation

On May 19, 2017, the State Administration of Taxation united with Ministry of Finance and One Bank and Three Commissions released 《Draft regulation on due diligence procedures for non-residents’ financial accounts》(“《the Draft》)，which came into effect on July 1, 2017. It means, our domestic financial institutions will conduct due diligence procedures for deposit account, custodial account, stock rights or creditor’ s rights of investment institution and insurance contract or annuity contract with cash value. This is known as the coming of Chinese CRS. In fact, early in September 2014, our country has decided to joint CRS; On July 1, 2015, the Standing Committee of the National People’s Congress approved 《The Multilateral Convention on Mutual Administrative Assistance in Tax Matters》; On December 17, 2015, our country signed 《Multilateral Competent Authority Agreement on Automatic Exchange of Financial Account Information on Tax Matters》.The Draft released on May 19 can be said to fulfill the obligations of《The Multilateral Convention on Mutual Administrative Assistance in Tax Matters》.

To our residents and especially high net worth individuals, the arrival of CRS puts forward new demands of asset allocation and overseas investment program. Beijing DOCVIT Law Firm Family Office Group will conduct brief analysis of CRS, hoping to assist clients to cope with CRS from financial assets self-inspection, holding entrustment relationship carding, trust and insurance project design, account transfer and service stop and so on.

1. What is the CRS?

The CRS is the acronym for Common Reporting Standard, translated as “consolidated reporting standard” or “common declaring norm” into Chinese, which is a part of Automatic Exchange Standards of Financial Account Information on Tax Matters. It was released by the Organization for Economic Co-operation and Development, OECD in July 2014, in order to reinforce global tax collaboration and increase transparency on tax information to combat tax evasion through offshore accounts. The CRS asks for signatories to conduct automatic exchange information regularly, so as to disclose economic property situation of the other country at home. To carry out CRS, there are two conditions necessarily. The one is that the country or district must have taken part in the CRS. The other is that the signatory or district have to become exchange information country by “voluntary match”.

Currently, one hundred and one countries and districts have promised to execute multilateral automatic exchange information, therein 54 countries and districts have promised to exchange information firstly on September 1, 2017; 47 countries and districts have promised to do it on September 1, 2018.

2.the CRS’s influence on Chinese residents

The arrival of the CRS will affect the people who have financial asset allocation abroad, the people who own Shell company’s investment and finance overseas, the natural person who establish the company in international trade abroad, the natural person who set up the family trust overseas, the people who purchase insurance abroad and so on.

Taking “tax haven” Canada as an example, Canada have promised to officially implement the CRS in September 2018, if it is successful, then Canada can realize to exchange information on tax matters with China. The financial organizations of Canada will recognize the bank account of Chinese tax residents through relevant procedure and send these information to competent department which will transfer information to China again. Compared financial information transferred by Canada with overseas assets declared by taxpayer, if (China) State Administration of Taxation find hided property, it will take appropriate punishment.

However, the “Chinese CRS” with function of exchange information, conducts mainly due diligence on non-resident accounts, but it will also affect Chinese residents. Because the judgement standard of tax residents is not nationality, Chinese residents may also be non-tax residents. China adopts standards of domicile and dwell time, if the individual owns domicile in China or has lived in China for one year without domicile, he can be judged as a Chinese tax resident. Based on the law of 《Corporate Income Tax》,the enterprise which has established in accordance of foreign（regional）law and the actual management organization is outside China, if it builds organizations and places in China, or not, but derived from Chinese enterprise, it is non-resident enterprise. For instance, the individual who sets up company in preferential tax country and completes overseas collection, but its realized income is derived from China, will be the object of due diligence by “Chinese CRS”.

2. How to deal with the CRS?

It seems that the CRS is a tax issue. To get to the bottom of it, the CRS is an in-depth reform of international governance rules spreading to billions of people. Especially for Chinese investor, it is an opportunity to completely conceive self-assets, framework, identity and global business. The CRS brings the rigid demand of assets self-inspection, so investors must have the concept of asset allocation, realize which assets are confronted with risk, and take steps to diagnose and dispose in advance.  

(1) Financial Assets Self-inspection

Individuals at abroad directly hold financial assets, investment insurance products, or own these assets via company and trust, as long as individual financial account information are all in exchange range. It is suggested that individuals who holding the above assets at abroad should conduct assets self-inspection as soon as possible.  

(2) Holding Entrustment Relationship Carding

The CRS requires to conduct deliberate due diligence on clients, therefore, for all frameworks held by entrustors, financial organizations need to identify the real controller at the back and regard it as the real reporting entity.   

(3) Trust and Insurance Project Design

According to the CRS, family trust information which have been established should also be disclosed, including the bailor (i.e. the property grantor), the protector, the bailee (usually the trust institution) and the beneficiary of family trust. Using reasonably family trust tools and insurance products configuration can give play to defer tax and avoid risk.

(4) Account Transfer and Service Stop

Although 101 countries and districts have promised to join the CRS, the actual implementation of every country is various, and they will make different reservation for the participant content and regions as well. Hence taxpayers can still choose to transfer accounts to the United States or the countries or regions which do not promise to exchange information. There is a vast planning space.

(5)Account Tax Consultation

Launching investment and assets allocation in the countries and regions which are integrally implementing the CRS, if the individual need to register overseas financial account, he can carry out legal tax planning to reduce actual tax burden. For example, foreign investments in different form of legal organization are different in obligation of tax and declaration rules in the tax law. In addition, transferring pricing reasonably is also the most commonly used tax avoidance of transnational enterprises.  

(6)  the Selection and Planning of Tax-resident Region

The core of the CRS is the identity of tax-resident, not the law-resident. People can choose no individual income tax and identity of tax-resident under some special tax system through changing habitual residence.

The arrival of the CRS increases transparency on residents’ overseas and domestic accounts, but reasonable planning space still exist. It is suggested that relevant people should take action in time, in order to achieve its own legitimate interest maximization.