SAT and PBOC Issue Rules on Due Diligence of Non-Resident Financial Accounts

On 9 May 2017, several financial regulators including the State Administration of Taxation (“SAT”) and the People’s Bank of China (“PBOC”) jointly issued the Administrative Measures for the Due Diligence Investigation of the Tax-related Information of Non-resident Financial Accounts, which will take effect 1 July 2017.

The measures facilitate an annual automatic exchange of financial account information with foreign jurisdictions following the Organisation for Economic Co-operation and Development (“OECD”)’s Common Reporting Standard, or CRS.

The measures require the following China-registered financial institutions to perform due diligence procedures on tax-related information of non-resident financial accounts:

  • Commercial banks.
  • Securities and futures companies.
  • Securities and private equity (“PE”) fund management companies and PE partnerships (but not financial asset management companies).
  • Insurance companies and insurance asset management companies.
  • Trust companies.

The measures require qualified financial institutions to (among other things):

  • Identify the tax residence status of individual and institutional account holders (or controllers).
  • Identify the financial accounts of non-residents.
  • Gather and report the relevant information on non-resident financial accounts and account holders.
  • Maintain the confidentiality of the information gathered and retain the information for no less than five years.
  • Register in the SAT’s website before 31 December 2017 and report the relevant information gathered during the due diligence exercise before 31 May of each year.

The measures also require non-resident financial account holders to timely, accurately and completely provide their financial institutions with the required information.

Market Reaction

Jon Eichelberger, Partner, Baker & McKenzie, Beijing

“While the measures are targeted at the financial accounts of non-residents, their impact on non-residents is not likely to be material because, under China’s foreign currency controls, non-residents have very limited channels for maintaining financial accounts in China. The greater impact by far will be on Chinese residents with financial accounts in other countries and jurisdictions, as the Chinese government, which taxes residents’ worldwide income, will automatically receive information about these accounts from the other participants under the Multilateral Competent Authority Agreement (“MCAA”). The automatic exchange of CRS information will change this situation dramatically and enable the tax authorities to collect more taxes from the foreign income of China’s residents.”

Action Items

General Counsel for qualified financial institutions will want to closely study the requirements under the measures and ensure these institutions install specific compliance mechanisms in relation to qualified accounts. Counsel may also wish to advise China residents with foreign financial accounts to make sure the information they disclose in relation to these accounts matches the CRS information that will be automatically disclosed to the Chinese government.