China Hunts Millions: Rich Residents Flee to America

Wealthy Chinese are increasingly looking for ways to keep their money out of the reach of the Chinese tax authorities. American banks in particular are benefiting from this development. Due to stricter tax rules in China, traditional financial centres such as Singapore and Hong Kong are losing their appeal. But the switch to the United States also entails risks.

The unrest among wealthy Chinese stems from stricter controls on foreign assets. China has drawn attention to income from foreign trusts, legal arrangements by which wealthy families manage their assets and transfer them to future generations. Since July, according to reports, a tax rate of 20 percent has been applied to certain income from such constructions, whereby the rules can also have retroactive consequences this.

For many Chinese wealthy people, this development comes at a sensitive time. For years, Singapore and Hong Kong were popular money-accommodating destinations. Both financial centres offer extensive wealth management capabilities and are widely used by families looking to spread their assets internationally. However, the stricter Chinese tax approach makes these constructions less attractive.

The international exchange of financial data plays an important role in this. China participates in the Common Reporting Standard (CRS), a system in which more than a hundred countries and jurisdictions automatically exchange information about foreign bank accounts. This makes it easier for the Chinese tax authorities to find out which assets residents hold abroad.

Chinese taxpayers should in principle pay tax on their global income. This means that foreign bank accounts or trusts are not automatically outside the scope of the Chinese tax authorities. In particular, the new controls make it clear that the authorities are increasingly monitoring compliance with existing obligations.

The United States is an attractive alternative for some wealthy Chinese, as the country does not participate in the CRS. US financial institutions are subject to another system for the exchange of tax information, the Foreign Account Tax Compliance Act (FATCA). That system mainly focuses on tracing foreign financial accounts of US taxpayers.

The difference is important. Where Singapore and Hong Kong can share financial information with China via the CRS, there is no comparable automatic data exchange with the Chinese tax authorities from the United States. As a result, some wealthy Chinese are once again looking at American banks and asset structures.

According to reports, US financial institutions are receiving more inquiries from Chinese clients looking to move their assets. This not only concerns ordinary bank accounts, but also more complicated asset management structures. For example, some families are exploring the possibilities of foreign trusts in US states such as Nevada and Florida.

Those states are attractive because of their laws around trusts and asset protection. Such constructions can help families manage and transfer their assets. At the same time, the use of a US trust does not mean that the owner automatically no longer owes tax in China.

Experts warn that the United States does not offer an easy escape route. Chinese taxpayers remain responsible for their filing obligations, regardless of where their assets are held. U.S. banks may also request additional information about the origin of the money and the individuals involved.

Although interest in US banks is increasing, it is not easy for wealthy Chinese to transfer large amounts abroad. China has been applying strict rules for capital movements for years. These limit the possibilities for residents to bring large sums of money outside the country without permission.

Especially wealthy people who still have their money in mainland China face these restrictions. According to bankers, it is therefore difficult to transfer new, large amounts to foreign accounts. The interest in US banks therefore comes for a significant proportion of people who have already transferred assets outside China.

For this group, moving assets from Singapore or Hong Kong to the United States is typically easier than transferring money directly from China. Nevertheless, even with such transactions, the question remains as to which tax rules apply and what information financial institutions must record.

The development shows how tax policy can influence international money flows. Singapore and Hong Kong remain important financial centers, but tighter Chinese controls are causing some wealthy families to reassess their existing constructions. As a result, US banks are getting more attention, while tax advisors emphasize that another place of business does not change the obligation to pay taxes due.