Upgraded Tax Inspections on Foreign Income: A Must – Read for U.S. and Hong Kong Stock Investors and Web3 Enthusiasts
Introduction
As China’s economy grows, domestic investors are increasingly venturing into U.S. and Hong Kong stocks. Recently, tax authorities in multiple Chinese provinces have announced stricter inspections of foreign income declarations. The amounts in question are significant, ranging from 127,200 to 1,413,000 yuan per case. In these actions, the tax treatment of investment income from Chinese tax residents in US and Hong Kong stocks has been given special attention.
1 Taxation of Chinese Tax Residents’ Income from U.S. and Hong Kong Stocks
Under Chinese tax law, tax residents are required to pay taxes on their global income, which includes earnings from U.S. and Hong Kong stock markets. The income derived from stock markets primarily takes two forms: dividends and capital gains from trading stocks (note that China does not have a separate capital gains tax, which are instead categorized under “property transfer income”).
– Taxation of Income from U.S. Stocks
For dividends received from U.S. stocks, Chinese investors must include these in their comprehensive income and pay individual income tax at a rate of 20%. According to Announcement No. 3 of 2020 by the State Taxation Administration, taxpayers may claim a tax credit based on the withholding tax paid in the U.S. Consequently, Chinese tax residents are required to report their U.S. stock dividends in full, deduct the taxes already paid abroad (within the credit limit), and calculate their tax liability in China using the formula: Tax Payable in China = Dividend Income × Chinese Tax Rate − Foreign Taxes Paid (within the credit limit). As for capital gains from U.S. stocks, Chinese investors are subject to a 20% individual income tax on property transfer income. Qualified foreign investment losses may be deducted before tax, and taxes paid abroad can also be claimed for a credit.
– Taxation of Income from Hong Kong Stocks
For dividends received from Hong Kong stocks, Chinese residents can purchase Hong Kong stocks through two channels: Stock Connect accounts or directly via Hong Kong brokerage accounts. According to the “Notice on Tax Policies for the Pilot Program of Shanghai-Hong Kong Stock Market Connectivity,” mainland individual investors receiving dividends from H shares are subject to a 20% withholding tax by the H-share company. For non-H-share dividends, China Securities Depository and Clearing Corporation Limited withholds taxes at a 20% rate. In the case of Red Chip stocks (companies controlled by Chinese mainland entities or with primary operations in China but listed in Hong Kong), the Red Chip enterprise withholds 10% corporate income tax at the corporate level before distributing dividends. However, not all post-tax profits are subject to the 10% corporate income tax. Therefore, individual investors’ tax rates on Hong Kong stocks range from 20% to 28%. Additionally, for investors who directly open securities accounts in Hong Kong to trade Hong Kong stocks, except for certain cases of H shares and Red Chip stocks requiring a 10% dividend tax, no withholding tax on dividends is applicable in other scenarios.
Regarding capital gains from Hong Kong stocks, tax treatment in mainland China differs based on two scenarios. First, for stock trading gains through Stock Connect accounts, individual income tax is exempt in mainland China. Second, for direct transfers of Hong Kong-listed company stocks via Hong Kong securities accounts, taxpayers must declare foreign income to the mainland tax authorities. Hong Kong does not impose capital gains tax on price differences from stock trading, thus no tax credit is available in mainland China. Investors are required to pay individual income tax at a rate of 20% on property transfer income.
2 How Do Chinese Mainland Tax Authorities Conduct Tax Inspections
In recent years, the State Taxation Administration of China has prioritized combating tax evasion among high-net-worth individuals, with dedicated teams monitoring large-scale fund movements and identifying personal tax risk points. Foreign income from sources such as U.S. stock investments falls within the scope of this surveillance. However, since income from overseas stock trading is primarily self-reported, Chinese tax authorities cannot directly regulate it through mechanisms like source withholding.
The Common Reporting Standard (CRS), led by the Organisation for Economic Co-operation and Development (OECD), is one of the tools used by Chinese mainland tax authorities to obtain tax-related information for audits. Under CRS, which China implemented in 2017, tax authorities can automatically access data on financial assets held by Chinese tax residents in foreign financial institutions, including deposits, investments, and insurance. As of 2025, 106 countries and regions (including mainland China and Hong Kong) have joined CRS, with information exchanges covering account balances, interest, and dividends. CRS does not set a global minimum threshold for individual account balances or reporting amounts; all accounts identified as “reportable accounts” must be declared and exchanged with the relevant tax authorities. However, some jurisdictions have established non-mandatory reporting thresholds in their legislation. For instance, Hong Kong’s “Regulations on the Automatic Exchange of Financial Account Information in Tax Matters” allows financial institutions to exempt pre-existing entity accounts with balances not exceeding USD 250,000 from immediate due diligence and reporting, though voluntary reporting on such accounts remains compliant. Consequently, accounts with larger balances are more likely to attract attention, but smaller accounts cannot be ruled out from information reporting and exchange.
Currently, the United States has not joined CRS and instead operates under its own information exchange framework—the Foreign Account Tax Compliance Act (FATCA). Effective globally since January 1, 2014, FATCA requires foreign financial institutions to disclose information on U.S. accounts to the U.S. tax authorities, or face taxation. There are two disclosure models: Model 1 involves governments reporting to the U.S. Internal Revenue Service (IRS) on behalf of their jurisdictions, while Model 2 requires financial institutions to report directly to the IRS. Since June 30, 2014, China and the U.S. have reached substantive agreements on the content of FATCA Model 1, and China is treated as a jurisdiction with an effective intergovernmental agreement. However, a formal intergovernmental agreement has yet to be signed between the two countries. Therefore, Chinese tax authorities cannot currently obtain information on tax residents’ U.S. accounts through CRS or FATCA information exchange mechanisms. In contrast, information exchange between mainland China and Hong Kong under CRS is relatively seamless.
However, CRS/FATCA mechanisms are not the sole means of information acquisition for tax authorities. At the market level, brokers from major stock markets such as U.S. and Hong Kong equities regularly report relevant transaction data to mainland tax authorities, which analyze this information to identify potential foreign income. Furthermore, the close collaboration between China’s State Taxation Administration and other government departments—such as financial regulators, human resources and social security bureaus, customs, and foreign exchange administration—allows tax authorities to integrate data on residents’ payment records, labor dispatch information, entry and exit records, and foreign exchange payments. Through individual income tax risk management systems, tax authorities comprehensively assess tax risks. In practice, these approaches play a more critical role in obtaining foreign tax-related information, risk assessment, and inspections.
3 How Do Chinese Mainland Tax Authorities Obtain Information on Web3 Income
Given the intensified focus on tax compliance for foreign investment income of Chinese tax residents, whether Web3 foreign earnings will become the next audit target is a pressing concern. Under Chinese tax law, Web3 income is taxable if it can be categorized under relevant tax headings, which is essentially a technical issue of legal application. In practice, a key prerequisite for effective tax collection by Chinese mainland tax authorities is their ability to access information on Web3 income of Chinese tax residents.
Under the current tax information processing framework, CRS applies to cryptocurrency-related financial flows. However, if investors engage in decentralized platforms (especially not on centralized exchanges or CEXs), CRS struggles to track transactions, making it difficult for mainland tax authorities to directly obtain relevant transaction data. Nevertheless, this does not imply that tax authorities are entirely unable to detect tax non-compliance in the Web3 domain. Similar to how tax authorities analyze residents’ foreign securities investment through multi-source data, they may also develop a risk indicator system for Web3 practitioners and investors. This could involve monitoring individuals’ travel to and from overseas locations, assessing whether their industry is closely linked to blockchain technology, and identifying whether they hold high-value assets without corresponding fiat account activity. Additionally, as the Web3 industry evolves, it is conceivable that Chinese tax authorities may establish closer ties with more cryptocurrency exchanges in the future to access user transaction records and profit/loss data. The recent repeal of the U.S. Internal Revenue Service’s (IRS) “Gross Proceeds Reporting by Brokers That Regularly Provide Services Effectuating Digital Asset Sales” suggests that while decentralized platforms may be challenging for tax authorities to regulate in the short term, centralized exchanges and platforms may not be as resistant to pressure.
4 Advice for Investors
With the advancement of global tax transparency and regulatory technology, the intensity of tax inspections on foreign income by Chinese tax authorities is bound to increase. In the long run, compliance may well align with long-term interests. For investors in U.S. and Hong Kong stocks and Web3, re-examining the compliance logic of cross-border assets and enhancing focus on cross-border income declaration issues has become imperative.
Against this backdrop, the FinTax cross-border tax consulting team can tailor solutions for you, including tax risk management and tax arrangement optimization:
Phase 1: If you have not yet received a notification from the tax authorities regarding the verification of personal foreign income tax situations, FinTax can assist you in comprehensively reviewing your domestic and foreign income and earnings, and prepare for potential tax risks in advance, in line with current individual income tax policies and foreign income risk management requirements.
Phase 2: If you have already received a notification from the tax authorities regarding the verification of personal foreign income tax situations:
(1) FinTax can help you organize data on foreign income for the relevant years as required by the notification, and prepare explanations for different types of income.
(2) In the event of tax interviews, risk assessments, or individual income tax inspections, FinTax can assist in preparing necessary documentation and provide response suggestions.
(3) FinTax can also offer optimization suggestions for your future foreign tax-related activities and individual income tax arrangements both domestically and internationally.