Beijing's 20% trust tax sends wealthy Chinese to U.S. banks

Beijing in July imposed a retroactive 20% tax on income and gains from overseas trusts owned by Chinese tax residents. Since then, inquiries about opening U.S. bank accounts have grown and assets previously held in Singapore or Hong Kong have been moving to the U.S., CNBC reported Oct. 23, citing private bankers and lawyers who work with Chinese clients.

Keith Tan, chief executive of Singapore-based Golden Acacia Capital, said his clients began planning exits to the U.S. in July and some had accounts set up in less than two months. His firm manages offshore portfolios for Chinese clients. "The hurdle is not that high for Chinese clients to open American accounts and transfer assets there," he said. "The practice has become relatively prevalent," he added.

A U.S. firm that opens an account without asking who files the client's worldwide income return has taken the deposit and left the harder question with the accountant in Singapore or Hong Kong. James Wang, chief executive of private-client tax advisor Blue Brick Consulting Group, told CNBC that China's regulations require people classified as Chinese tax residents to self-declare worldwide income to Beijing. CNBC also reported that Chinese families whose children hold U.S. green cards have used foreign grantor trusts, a structure the report describes as treated as owned by a non-U.S. person; the vehicle changes who reports what, not whether a Chinese tax resident owes Beijing an account of worldwide income.

Because the U.S. sits outside the Common Reporting Standard, American banks have no obligation to report China-linked accounts, CNBC reported. Large private banks attract wealthy clients, Tan said; smaller accounts go to regional banks or online brokers. A New York-based wealth-planning advisor who works with Chinese family offices told CNBC that U.S. banks are straining to keep up with demand and some have shortened the time clients have to meet minimum capital commitments before accounts are subject to closure. The advisor spoke on condition of anonymity to discuss bank processes.

For a U.S. firm, the diligence question at onboarding is narrow: which jurisdiction treats this client as a tax resident, who files where, and who has the file. Tan's clients opened accounts in under two months, while tax lawyers in Singapore and Hong Kong are still tallying what their clients owe, unwinding trusts, selling listed shares or arranging loans to cover the bill. The open question is who owns the filing conversation once the account is open — the bank, the client's existing offshore lawyer, or the advisor who inherits the relationship.