Wealthy Chinese move offshore money to U.S. banks as Beijing’s tax net widens

SINGAPORE — Wealthy Chinese rattled by Beijing's widening hunt for overseas wealth are turning to a once-familiar refuge for their money: the U.S. 

Private bankers and lawyers who work with Chinese clients say inquiries about opening U.S. bank accounts have grown in the months after Beijing imposed retroactive taxes on offshore wealth in July, moving assets previously stored in Singapore or Hong Kong there to stay further away from Beijing's reach. 

"It has become relatively prevalent," said Keith Tan, CEO of Singapore-based Golden Acacia Capital, who is helping Chinese clients manage their offshore portfolios. His clients began planning exits to the U.S. in July, and some have the accounts set up in less than two months. "The hurdle is not that high for Chinese clients to open American accounts and transfer assets there." 

Wealthy clients tend to choose large private banks while smaller accounts go to regional banks or online brokers, Tan said.

The rush has gained urgency with China's new tax regime on offshore trusts. Authorities said in July that income and gains from overseas trusts owned by Chinese tax residents would be taxed at 20%, setting off a scramble for cash and alternative structures. 

Lawyers in Singapore and Hong Kong have been working to tally how much tax their clients owe, facilitating trusts' unwinding, sales of shares in listed companies or applying for loans to meet the outsized tax bill. 

Meanwhile, the U.S. sits outside the Common Reporting Standard, or CRS, the OECD framework under which more than 100 jurisdictions automatically share financial account data. While banks in Singapore and Hong Kong are supposed to report China-linked accounts to Beijing, American banks have no such obligation. 

Non-resident clients who open foreign bank accounts in the U.S. can also find investment vehicles with reduced or no tax-filing obligations to the Internal Revenue Service, said James Wang, CEO of Blue Brick Consulting Group, a private-client tax advisor. But China's latest regulations require people classified as Chinese tax residents to self-declare worldwide income to Beijing, Wang said.  

Banks in New York are seizing the opportunity to offer a solution that could shield Chinese customers from their country's tax man. U.S. banks are straining to keep up with the rise in demand, according to a New York-based wealth-planning advisor who works with Chinese family offices.

"With inquiries surging, some banks have shortened the timeframe for clients to meet required minimum capital commitments" before the accounts are subject to closure, said the advisor, who requested anonymity to speak about bank processes.

Chinese families with offspring holding U.S. green cards have also used foreign grantor trusts – structures treated as owned by their non-American founder – to shield them from some tax exposure in the U.S., Tan said. Low-tax states such as Nevada and Florida have become popular choices, he added. 

"They are gambling on not being disclosed, because the U.S. does not share information as part of the CRS system; they can dodge tax authorities," said Clifford Ng, a partner at Zhong Lun law firm in Hong Kong. Ng also expects that some with Hong Kong or Singapore residency whose trusts have not yet been flagged to Beijing may unwind those structures and transfer the money out.

Lawyers caution that though the route works for now to avoid disclosure, it may be temporary. Money held offshore has probably already been reported to Beijing through the CRS and would "have shown up in China at some point," Ng said, so a transfer from a Singapore or Hong Kong bank to a U.S. one would be visible on its way out. 

"They may still be in breach of the rules because they have an undisclosed offshore account that's making money and they're not declaring it onshore," Ng said. "Hiding is not tax planning."

Washington's Foreign Account Tax Compliance Act requires foreign banks to report American clients, but so far there's no matching automatic flow from U.S. banks to Beijing. 

Cris Cao, Beijing-based partner at W&H Law Firm, agreed on the risk of Beijing's ability to tax money moved to the U.S. "Even if they move all the money out of the CRS-reported accounts and into U.S. bank accounts, that doesn't naturally reduce or wipe out the tax authorities' right to tax, or their obligation to pay," he said.

"There was a record of it being transferred out," Cao said, and "that alone is enough for the tax authorities to levy tax."

What's more, the window of opportunity may have closed. Moving money that is already offshore around is relatively easy, but getting capital out of mainland China has become increasingly difficult.

"Nearly no sizeable money onshore will be able to leave the country from now on," said Jingkuan Lin, a private banker at Bank of Singapore, who sees the offshore banking industry being further limited to serving the existing pool of capital outside China.