Recently, some customers have received phone calls or text messages from the tax bureau, notifying them to declare taxes on overseas income. Especially as the deadline for retroactive collection on June 30, 2025 is approaching, if the supplementary collection application has not been completed, it should be started as soon as possible.

We provide the following analysis to draw the attention of our clients to the frequently involved and sensitive issues in declaration preparation. For the scope, form, and content of the declaration, it is still recommended to consult a lawyer to avoid corresponding risks. Especially for clients who have received further on-site explanations from the tax bureau, attention should be paid, and their initial declaration should be reviewed for any omissions, and they should actively respond to on-site explanations.

1、 How can tax authorities obtain information on overseas income

The tax authorities exchange information through the Common Reporting Standard (CRS) system. The Common Declaration Standard is a set of tax information exchange systems released by the Organisation for Economic Co operation and Development (OECD) since 2014, which provides guidance on the rules, requirements, and procedures for automatic exchange of financial account tax related information between tax authorities in various countries. In fact, since September 2018, the State Administration of Taxation of China has achieved the first exchange of information with tax authorities in other countries and regions.

When opening an account in a bank in Hong Kong, in addition to submitting proof of identity, the bank will require individuals to check their tax residency status in the application form. If they are tax residents of China, the bank account information will be exchanged back to the Chinese tax authorities. Not only Chinese tax resident individuals, but also passive non-financial institutions controlled by them, such as offshore holding companies established as controlling shareholders, are subject to this jurisdiction. How to confirm whether it belongs to a negative non-financial institution, it is necessary to analyze its asset composition and income sources, and it is recommended to consult a professional lawyer for screening.

2、 The granularity of account information that tax authorities can receive

If you have received a notice from the tax bureau requesting additional taxes, it is recommended not to have a mentality of taking chances. According to the implementation regulations of the common declaration standards, usually, the information of the following financial accounts will be exchanged back domestically:

1. Account Information - Information of account holders in financial assets such as deposit accounts, custodial accounts, equity or debt trading accounts, such as name, identification number (i.e. "taxpayer identification number"), and address;

2. Account financial information - year-end account balance, interest, dividends, and other income amounts, etc. Note that insurance contracts with cash value may also be included in management.

3、 Which overseas income needs to be taxed

For domestic individuals, the main overseas income involved this time is interest, dividends, bonus income, as well as income from the transfer of such stocks and equity. If holding property overseas, it may also include income from property leasing or transfer.

The Ministry of Finance and the State Administration of Taxation issued Announcement No. 3 of 2020 on the Personal Income Tax Policies Related to Overseas Income (Announcement No. 3), which specifically stipulates:

1、 The following income is from sources outside of China:

（1） Income obtained from providing labor services outside of China due to employment, performance, etc;

（2） Income from remuneration paid and borne by enterprises and other organizations outside of China;

（3） The income obtained from licensing various franchise rights for use outside of China;

（4） Income related to production and business activities obtained from engaging in production and business activities outside of China;

（5） Interest, dividends, and bonus income obtained from enterprises, other organizations, and non resident individuals outside of China;

（6） Income obtained from leasing property to tenants for use outside of China;

（7） The income obtained from the transfer of real estate outside of China, the transfer of stocks, equity, and other equity assets formed by investments in enterprises and other organizations outside of China (hereinafter referred to as equity assets), or the transfer of other property outside of China. However, for equity assets formed by the transfer of investments in enterprises and other organizations outside of China, if at any time within the three years prior to the transfer (36 consecutive calendar months), more than 50% of the fair value of the assets of the invested enterprise or other organization directly or indirectly comes from real estate located within China, the income obtained shall be income from within China;

（8） Accidental income paid and borne by enterprises, other organizations, and non resident individuals outside of China;

（9） If the Ministry of Finance and the State Administration of Taxation have other regulations, they shall be implemented in accordance with relevant regulations.

4、 Can stock losses be offset?

Firstly, it should be clarified that according to the provisions of Announcement No. 3, losses of domestic accounts cannot be offset against the taxable amount of overseas accounts.

(3) Income from interest, dividends, bonuses, property leasing, property transfer, and incidental income (hereinafter referred to as other classified income) derived by individual residents from outside China shall not be merged with domestic income and shall be separately calculated for taxable amount

However, for deductions in overseas accounts, the situation involved is quite complex. For example, is the tax payable calculated based on the capital gains of a single transaction in stock trading, or based on the annual net amount? If it is levied based on property transfer, it should be levied accordingly. For customers with high transaction frequency, the complexity of the declaration process increases exponentially; If according to the provisions of the Notice of the State Administration of Taxation on Clarifying the Self Tax Declaration Criteria for Annual Income of Over 120000 yuan (Guoshuihan (2006) No. 1200):

(VI) Income from stock transfer. The declared income amount is the positive number of the personal stock transfer income and the loss or profit offset within a tax year. If the loss or profit offset is negative, this income shall be filled in as "zero". ”

From this principle, it can be inferred that stock trading should be paid based on the annual net profit. However, whether this provision applies to overseas income remains to be debated.

In addition, there are still many issues related to loss deduction that lack clear regulations and past practices. For example, in the past, due to the "new listing" of Hong Kong stocks, many clients opened trading accounts with multiple Hong Kong stocks in order to increase the chances of winning. Can the losses between several overseas accounts be offset against each other? For situations where there are no clear regulations yet, it is recommended that clients consult with professional lawyers when calculating loss deductions.

5、 What exchange rate is used to convert foreign currency income obtained during declaration into Chinese yuan?

According to Article 32 of the Implementation Regulations of the Personal Income Tax Law of the People's Republic of China, if it belongs to the supplementary tax collection, it shall be calculated in accordance with the provisions of the last paragraph and converted into RMB based on the middle rate of the RMB exchange rate on the last day of the previous tax year.

Article 32: For income in currencies other than RMB, the taxable income shall be calculated by converting it into RMB based on the middle rate of the RMB exchange rate on the last day of the previous month when tax declaration or withholding declaration was made. For income in currencies other than RMB that has already been prepaid monthly, quarterly, or on a per use basis after the end of the fiscal year, no further conversion shall be made. For income that should be paid additional taxes, the taxable income shall be calculated by converting it into RMB based on the middle rate of the RMB exchange rate on the last day of the previous fiscal year

6、 Will foreign exchange regulatory agencies pursue foreign exchange compliance issues after truthfully filing tax declarations?

If the outbound funds involve compliance issues with historical foreign exchange outflows, there is a real risk of being pursued by foreign exchange regulatory agencies in the future. The State Administration of Taxation and the State Administration of Foreign Exchange signed a memorandum of cooperation on promoting joint supervision of information sharing in 2016

The Memorandum specifies that the State Administration of Taxation and the State Administration of Foreign Exchange shall jointly establish a daily information exchange mechanism to share relevant data on tax collection and foreign exchange supervision. The two departments shall use the shared data to monitor, evaluate and warn of export tax rebate management, cross-border tax source management, foreign exchange payment and receipt management, etc., to improve the timeliness and accuracy of discovering and investigating illegal and irregular behaviors. At the same time, based on the shared enterprise classification management information, they shall jointly implement corresponding joint incentive and disciplinary measures to achieve "information exchange, regulatory mutual assistance, and mutual recognition of results".

Deep cooperation and information exchange between the two departments in the future seem to be an inevitable trend. But in terms of tax declaration, making false declarations to avoid the risk of foreign regulatory compliance is like drinking poison to quench thirst. It is recommended that clients facing such risks consult a lawyer as soon as possible for appropriate remedial measures.

The deadline for "630" is approaching, and the work of supplementing overseas income has just begun. Customers who have received notification should actively respond, while those who have not yet received notification should adjust their investment strategies and channels as soon as possible to optimize their tax structure and increase investment returns. For example, under this round of collection, QDII products and Hong Kong Stock Connect have demonstrated tax advantages compared to directly opening accounts overseas.

In the face of the new economic cycle, the allocation of overseas assets should also pay more attention to safety and compliance. A structured layout within a compliance framework is necessary to achieve stability and continuity in the long-term appreciation of assets.