Authorities are ramping up efforts to recover unpaid taxes on foreign-sourced income, with many individuals now facing retrospective audits. Reports from February 8 indicate that tax collection on overseas earnings is set to become a key focus of enforcement this year, drawing significant public attention.
The crackdown is intensifying, and even income from U.S. stocks may not escape scrutiny. Media reports plainly state that China’s fiscal revenue growth in 2025 appeared "strained," with total tax revenue reaching 17.6363 trillion yuan, a mere 0.8% increase. In contrast, personal income tax revenue surged by 11.5%, outpacing value-added tax and corporate income tax. A substantial portion of this growth is attributed to the collection of taxes on overseas income.
Recent cases publicized by local tax authorities illustrate the scale of recoveries: one individual in Guangdong repaid 1.7 million yuan, another in Shenzhen paid 3.36 million, a case in Xiamen involved 6.987 million, a Sichuan resident paid 6.659 million, and a taxpayer in Fujian settled 5.6145 million. These figures highlight that the amounts involved can far exceed ordinary expectations.
Institutional forecasts suggest fiscal revenue growth will remain modest in 2026, with the fiscal deficit rate likely hovering around 4%. Against this backdrop, strengthening tax management on the overseas income of high-net-worth individuals has become a crucial strategy for optimizing tax revenue sources.
This effort is supported by the increasing maturity of the Common Reporting Standard (CRS). CRS is a global system for the automatic exchange of financial account information, designed to combat tax evasion, with participation from over 120 jurisdictions. If an individual holds financial accounts in any participating country, the relevant information is automatically reported to their country of tax residence.
While some nations, including the United States, have not joined CRS, tax transparency is still advancing. For example, investing in U.S. stocks through American banks or brokers may not shield investors from tax recovery actions. Industry experts note that although the U.S. is not part of CRS, a specific information exchange mechanism exists under the Sino-U.S. tax treaty, though operational consensus has yet to be fully established. Data alignment is incomplete but is expected over time.
For participating countries, since China implemented CRS rules in 2017, tax authorities have been able to obtain information on non-resident accounts from financial institutions, including account balances, transaction records, and holder details from overseas banks, securities, and trusts. This data undergoes verification and cleaning before being cross-referenced with China’s Golden Tax System Phase IV. By 2026, data alignment is anticipated to be largely complete, enabling more efficient identification and taxation of overseas income.
How is the crackdown being conducted? Audits now cover longer periods and impose steeper penalties. Starting in the second half of 2024, many investors received notifications via tax app pop-ups, SMS, or phone calls urging self-declaration of foreign income. At that time, the review period mainly covered the previous three years, focusing on 2022 and 2023. Notices were relatively mild, warning that non-compliance could affect credit records and "recommending careful self-inspection."
While some taxpayers complied, many adopted a wait-and-see approach. Social media platforms were filled with speculative queries, such as whether small amounts would be overlooked, if no notification meant no action was needed, or whether ignoring repayment demands was feasible. Some even questioned the consequences, suggesting worst-case scenarios might only involve being labeled a "deadbeat."
In retrospect, those early warnings may have been the tax authority’s final leniency. By 2026, the approach shifted markedly. In early January, state media clarified that under tax collection laws, if underpayment results from failure to declare or miscalculation, authorities can recover taxes and late fees within three years; cases involving tax evasion face legal penalties. Reports also revealed that the retroactive period for overseas income audits has been extended, potentially reaching back to 2020 or even 2017.
Industry insiders explain that whether recovery extends to 2017 depends on intent. Unintentional underpayment typically allows a three-year review, extendable to five years for larger amounts exceeding 100,000 yuan; 2017 falls outside this window. However, deliberate evasion has no time limit, permitting unlimited retrospective action, including recovery of taxes, late fees, and fines ranging from 0.5 to 5 times the owed amount. Since CRS took effect in China in 2017, evasion after that date may form a complete evidence chain, giving tax authorities legal grounds for pursuit.
How should taxes be repaid? China’s global taxation rules have long been clear: Chinese tax residents must declare foreign income between March 1 and June 30 of the following year. This includes wages, capital gains from property or stock sales, interest, dividends, and other earnings. Proactive compliance is advised over waiting for an audit.
Based on investor experiences, key details merit attention: 1. Dividends from 2022–2024 are taxed at 20%, regardless of annual losses. If 10% was previously withheld, provide proof and pay the remaining 10%. 2. Net gains—calculated as realized profits minus realized losses in a given year—are taxed at 20%; no tax is due for years with net losses. Taxes apply only to realized gains from actual sales, as China’s system follows the realization principle; unrealized paper gains are not taxed. 3. Late declarations incur late fees, calculated at an annualized 18% from June 30, the annual tax filing deadline. 4. For non-U.S. stocks or specific non-Hong Kong Connect shares, using the Hong Kong Stock Connect may be more tax-efficient. Long-term holdings in Hong Kong stocks can reduce tax liabilities. 5. Gains, losses, and dividends from A-shares bought via Stock Connect are tax-exempt. 6. Losses cannot be carried forward across years. 7. Declarations can be amended via the tax app or submitted in person at tax offices.
In conclusion, under global financial information exchange systems, overseas income will eventually come to light. Delaying repayment only increases late fees, credit damage, and exposure risks. Experts advise taxpayers to explore legal tax benefits, such as leveraging double taxation agreements to avoid being taxed twice on the same income. Proactive planning and lawful strategies are essential for sustainable investing.
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