By Bill Ye and Zhao Wenxiang King & Wood Mallesons’ Commercial & Regulatory group

The ‘Measures on the Due Diligence of Non-resident Financial Account Information in Tax Matters’ (the “CRS ”) are now in place, six months after the release of the draft for comment (the “Draft”). In response to the upcoming individual income tax reform, we have summarized the key points of the CRS Regulations.

What changes were made to the Draft?

The Common Reporting Standards Regulations (the “CRS”) made little change to the Draft besides some improvements in wording and concepts, and a delay in promulgation. Highlights of the CRS were discussed in our previous article “When Banks Meet Tax Authorities — Key Issues that Lawyers Should Know about Tax Administration in the New Finance Era (I)”. This article focuses on three amendments:

1.U.S. dollars as the currency

The CRS changes the denominated currency of an account balance from RMB to U.S. dollars to conform with OECD rules. The CRS covers personal accounts with a balance of more than 1 million U.S. dollars (RMB 6 million in the Draft) and institutional accounts with a balance of more than 250,000 U.S. dollars (RMB 1.5 million in the Draft). Financial institutions need to convert the account balance into U.S. dollars using the middle exchange rate of the People’s Bank of China on the day of conversion.

2.Anti-money laundering identification procedure fully included

In the Draft, financial institutions were required to engage the anti-money laundering client identification procedure only when a new account was identified as a Passive Non-Financial Entity. (“Passive NFE”)In addition to the rules in the Anti-Money Laundering Law, the CRS also requires that information collected is fully used in due diligence. Tax evasion is closely related to money laundering. Banks and other financial institutions already vet clients for money laundering, but this amendment will increase the accuracy of due diligence and reduce compliance costs.

3.Improved regulatory regime

The collection of financial account information in tax matters largely depends on compliance. The Draft was written by the State Administration of Taxation (“SAT”), which does not regulate financial institutions. Whereas, the CRS was developed by the main regulators of financial institutions (the People’s Bank of China, the China Banking Regulatory Commission, the China Securities Regulatory Commission and the China Insurance Regulatory Commission) in order to facilitate regulatory accountability.

The CRS aims at targeting taxation problems, particularly personal income tax problems

Rules around information exchange are found in the “Automatic Exchange of Financial Account Information” (“AEFAI”) framework of the CRS. The reciprocal exchange of information in the second and third categories enables tax authorities to assess residents’ overseas assets and carry out targeted tax collection.

Invisible or visible: challenges and opportunities faced by taxpayers

1.Who will be affected by the CRS regulations?

China’s CRS will not have as strong an impact on individuals as may be thought. Although, non-resident accounts opened in China, Passive NFE with non-resident controllers and Chinese financial institutions will be directly affected.

To the contrary, CRS regulations in other countries may have more impact on Chinese tax residents who invest overseas, purchase cash-value insurances or have trade or family trust arrangements through offshore companies. With increasing global tax transparency, information pertaining to the offshore financial accounts of Chinese tax residents will gradually be obtained by Chinese authorities. If Chinese taxpayers hide their overseas assets and income from tax authorities, they may face high tax bills in the future.

2.Tax compliance challenges faced by taxpayers

For a long time, Chinese tax authorities have levied tax from individuals by withholding at source but have lacked effective measures for non-labor income. If taxpayers do not declare their income it is difficult for tax authorities to obtain relevant information. This situation has been improving in recent years in the following ways:

(1) Policy making: the need to strengthen the risk management of high net worth taxpayers has been reiterated time and again in the income tax and tax administration reform plans of the State Council and tax authorities. The CRS information exchange is not only a positive step towards global tax transparency, but also necessary to strengthen administration of high net worth taxpayers.

(2) Government agencies: the income tax office of the Tax Policy Department of the Ministry of Finance has now been split into two separate offices – personal and enterprise. This institutional adjustment reflects the acceleration of personal income tax reform. There are three main areas of future personal income tax reform:

  • Shift from category-based to comprehensive income taxation;
  • Tax administration will be further strengthened;
  • High-income individuals will face a stricter tax policy.

(3) Information exchange: a mechanism for tax information sharing is being gradually established. Financial account information is of great importance to tax authorities in reviewing the information declared by taxpayers. Article 42 of the CRS provides that “the State Administration of Taxation and related financial authorities shall establish a tax information sharing mechanism to ensure that the State Administration of Taxation will obtain the information required by the Measures in a timely manner”. Currently this only applies to non-resident financial accounts, but the scope may be extended to Chinese tax residents in the future, given the rapid development of personal income tax reform. Information sharing between the State Administration of Taxation and the State Administration of Foreign Exchange has been recently established.

3.Other issues and work to be done for compliance

The purpose of the CRS is information exchange. Therefore, all legal risks that may arise through information exchange must be considered. These include: confidentiality of an investor’s identity and operation of assets, money laundering, commercial bribery, and the impact on the wealth management industry.

The CRS must be considered when engaging in cross-border transactions and asset acquisitions for issues arising from information exchange, especially tax issues and tax planning. In designing transaction and asset possession structures, investors must consider the CRS and related laws and regulations.

4.Opportunities for taxpayers in the transition period

Currently, information exchanged under the AEOI is limited. It is only targeted at specific entities and account information. For example, non-financial assets such like real estate and the de facto controller of active non-financial entities are outside the scope of information exchange (although the possibility of indirect impact remains). More than 50% of the NFE’s gross income is passive income such as dividends and interest.

The CRS information exchange mechanism is not yet in force. Over 100 countries have agreed to exchange information, but specifics are still being negotiated before a mechanism is implemented. Tax payers of high net worth can take advantage of this transition period by engaging in: diversified, planned global asset allocation and management, reducing taxes and fees through legitimate transactions, and assessing transactions for tax risks.  This is important for all tax residents but especially those who have all their assets in China.


After the Draft was issued, we held seminars and were consulted on the CRS and related issues. Below is an example of a question we were asked and our answer.

Q: I have overseas financial accounts which are subject to information exchange. If I change my citizenship or obtain permanent residence in another country, will I be exempt from exchanging account information with China?

A: Unfortunately not, for the following reasons:

  • Legal definitions of “tax resident” are generally broader than the definitions of “national” or “resident” in nationality laws. If a person has been residing in China, he/she is a Chinese tax resident, regardless of a change in citizenship or permanent residence. For example, Chinese law states that tax residents are: those who have a domicile within the territory of China, or have stayed in China more than a year. “Having a domicile within the territory of China” means having habitual residence within the territory of China by way of household registration, family or economic relations.
  • Due diligence by financial institutions involves a comprehensive assessment of an account holder’s information. For example, vetting of a high net worth individual with a pre-existing overseas account will involve a search of both electronic and paper records (for the preceding five years) for non-resident information. Financial institutions will also rely on self-certification and other certifications provided by account holders.

If a Chinese tax resident has pre-existing overseas accounts they are likely to trace back to China eventually – regardless of a change in citizenship or self-certification of tax resident status in the immigration country. If a person resides solely in China they are a Chinese tax resident. In this case, due diligence is likely to require more information to prove the person is not a Chinese tax resident. Eventually, information is likely to be exchanged with China by the financial institution.