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Tax authorities are implementing new 2025 directives requiring mainland China residents to declare and pay taxes on foreign-sourced income. This operational rollout of the Common Reporting Standard (CRS) now places domestic taxpayers firmly within the scope of global tax transparency.

The development comes amid increasing overseas investment, with many companies and individuals having established entities or funds in jurisdictions like Singapore, the Cayman Islands and British Virgin Islands for purposes ranging from financing and restructuring to asset protection. These offshore structures are now subject to CRS reporting obligations.

Established by the Organisation for Economic Co-operation and Development (OECD) in 2014, the CRS is a cornerstone of international tax co-operation and transparency efforts, enabling automatic reporting and cross-border exchange of financial account information between jurisdictions.

Offshore tax avoidance?

The CRS does not directly share corporate ownership information of overseas companies. However, global financial institutions operate under both their home country¡¯s laws and jurisdictions where they do business, while also bound by a web of international regulations from anti-money laundering to cross-border tax agreements.

As part of their due diligence, these institutions are required to identify the ultimate beneficial owners behind all accounts. So, if a Chinese tax resident is found to be the controlling person of an offshore company account, the financial institution is obliged to report details such as the account balance, interest and dividends directly to tax authorities in China.

Under the CRS framework, where an entity ¨C typically a legal person or arrangement other than a natural person ¨C is identified as a ¡°passive non-financial entity¡±, their tax-relevant information of accounts will be exchanged directly with the jurisdiction of the controlling person¡¯s residence.

For example, a BVI company established by a Chinese tax resident may be classified as such if more than 50% of its income or assets are passive ¨C that is, derived primarily from trading, dividends or interest in financial assets such as stocks, bonds and wealth management products.

Any individual holding more than 25% of shares or voting rights in the entity is likely to be treated as a controlling person, triggering automatic exchange of the company¡¯s account information with tax authorities in their country of residence.

Multilayered corporate structures provide no exemption from stringent due diligence checks mandated by the CRS.

Financial institutions are required to pierce through each layer of ownership to identify the ultimate controlling persons and disclose their findings to relevant tax authorities. Due to their inherent lack of transparency, such complex arrangements have become a primary focus of tax enforcement efforts globally.

Under domestic tax law, entities controlled by a resident individual are not typically liable to personal income tax liability until profits are distributed. However, if the entity is classified as a controlled foreign company ¨C or its assets and income attract scrutiny under anti-avoidance provisions ¨C personal tax liability may be triggered at an earlier stage.

Common misconceptions

In practice, many businesses and individuals adopt flawed approaches in attempting to circumvent CRS reporting, often falling into the following categories of misunderstanding.

Emigrating to a low-tax jurisdiction. Tax liability is determined not by nationality but status as a tax resident. Individuals with household registration, family, economic interests, property or habitual residence remain tax residents, even with foreign or dual citizenship.

Dispersing funds. A widespread misconception is that dispersing funds across multiple accounts can circumvent CRS reporting and exchange. In practice, however, the framework does not apply a minimum account balance threshold. Regardless of amount held, account information is subject to collection and automatic exchange.

Shifting assets to non-CRS jurisdictions. While the US and several other territories have not yet adopted CRS, moving financial assets to these regions may attract heightened scrutiny, even triggering anti-avoidance or anti-money laundering investigations.

Although account information held in non-CRS jurisdictions is not automatically exchanged, such assets may face liquidity constraints ¨C effectively becoming ¡°trapped¡± locally. Large fund transfers from non-CRS jurisdictions into new accounts in other countries are also subject to enhanced due diligence.

Nominee arrangements. If the nominal account holder is a Chinese tax resident, the account information will still be reported to the Chinese tax authorities. If the holder is a tax resident elsewhere, the information may need to be declared by the individual themselves or exchanged with their jurisdiction, many of which maintain rigorous tax enforcement, particularly in most developed countries. Crucially, such arrangements carry inherent legal vulnerabilities. Should the nominee deny the agreement, pass away, divorce or face debt claims, the beneficial owner may struggle to reclaim the assets, often at substantial legal cost, despite any written agreement.

Investing in high-value overseas assets. While real estate, art and other physical assets often fall outside automatic reporting frameworks, the bank accounts used to purchase them do not. Also, real estate values are highly susceptible to market fluctuations and entail significant taxes, maintenance and holding costs, particularly in developed jurisdictions, often eroding potential returns.

Similarly, art and antiquities are vulnerable to volatile valuations and market speculation. Such investments risk substantial financial loss or exposure to fraud.

Strategic planning

Tax residency dictates the flow of information under the CRS. While individuals may possibly alter their tax residency by strategically relocating or reorganising personal, family or economic ties, any such changes must be underpinned by legitimate economic substance. Purely formal arrangements are likely to be challenged by tax authorities.

Where a change in tax residency is not feasible, alternative structures may be used to avoid holding assets directly and optimise overall asset allocation. These include: (1) avoiding holding financial assets through shell companies, which risk being pierced under the CRS; (2) making use of double taxation agreements to legitimately reduce withholding rates on dividends and interest; (3) establishing family trusts; and (4) applying tailored tax treatments for non-monetary assets.

Yan Ge is a senior partner and Yuan Yao is a partner at Joint-Win Partners