Key facts
- China's new rule to collect income tax on offshore trusts could pose short-term risks to certain stocks.
- The tax applies to assets placed in offshore trusts and the income they generate.
- The payment deadline for these taxes is October 22.
- Offshore-listing private companies may face more scrutiny than state-owned companies.
- Haidilao's major shareholder sold 259 million shares this month, dropping its stock 17%.
China's new regulation aimed at collecting income tax on offshore trusts, a structure favored by shareholders of many Chinese companies listed in Hong Kong and the US, could create short-term risks for specific stocks as the payment deadline approaches, according to BofA Securities. The Chinese authorities announced in July that individual income tax would be imposed on assets placed in offshore trusts and the income they generate, with unpaid taxes due within 90 days, which is now nearing its end.
Winni Wu, BofA Securities China Equity Strategist, indicated that offshore-listing private companies might face greater scrutiny compared to state-owned enterprises. The approaching deadline of October 22 gives about a month to observe the actual market impact. Wu believes that while the tax collection could lead to event risks for individual stocks, it is unlikely to be a primary driver for the broader Hong Kong market. She also suggested that company owners and shareholders might be able to negotiate with local tax bureaus, as some tax liabilities could be substantial, making immediate full payment unrealistic for many.
Earlier reports cited lawyers and advisers indicating that the crackdown is prompting wealthy Chinese individuals to re-evaluate their trust structures and investment holdings.