Individual Income Tax Law Introduces Anti-avoidance Clauses

Individual Income Tax Law Introduces Anti-avoidance Clauses


The revised individual income tax law, which has received much attention, has recently been approved by the Standing Committee of the National People's Congress and will be fully implemented on January 1 next year. Among them, the first introduction of the anti-avoidance clauses means that strengthening the collection and management of high-net-worth people has attracted much attention.

Wang Lei, the managing partner of PwC China's private customer service, told CBN reporter that with the implementation of the CRS (Common Reporting Standard for Overseas Financial Accounts), anti-avoidance legislation at the individual income tax level has become urgent. To give a simple example, Chinese individual A invests overseas through the shell company in BVI (Tax Heaven Virgin Islands). As long as the profit of the company in BVI is not allocated to the individual shareholder, under the current tax law, individual A does not need to pay taxes. However, under the anti-avoidance clause, the Chinese tax authorities may, in the name of the controlled affiliate company, treat the profits obtained by the company in BVI without commercial substance as the direct income of the individual and tax the profits.

"Therefore, the establishment of the anti-avoidance clause in the new individual income tax law will give the Chinese tax authorities a strong legal basis, and they can make use of the information on overseas financial assets received under the CRS to push the compliance and fairness of China's personal income tax into a completely new situation." Wang Lei said.

According to the revised individual income tax law promulgated by the China National People's Congress, the newly added anti-avoidance clause is Article 8. In any of the following circumstances, the tax authorities have the right to make tax adjustments according to reasonable methods: business transactions between individuals and their related parties which are not in line with the principle of independent transactions reduce the amount of tax payable of the individuals or their related parties without justification; enterprises controlled by the individual residents, or jointly controlled by the individual residents and the resident enterprises which are established in the countries (regions) where the actual tax burden is significantly low, do not allocate the profits or reduce the allocation of profits that should be attributed to the individual residents without reasonable business needs; Individuals implement other arrangements that do not have reasonable commercial purposes and obtain improper tax benefits. If the taxation authority makes tax adjustments in accordance with the preceding clause and if it is necessary to replenish the taxes, the taxes shall be replenished and the interest shall be charged according to law.

On June 19, the Minister of Finance, Liu Kun, made a statement on the proposal to review the Amendement of the Individual Income Tax Law of the People's Republic of China (Draft), saying that the phenomenon of individuals using various means to evade taxes has occurred from time to time at present. In order to block tax loopholes and safeguard national tax rights and interests, the above clause is established in the draft with reference to the anti-avoidance clauses of the Corporate Income Tax Law.

By Courtesy of


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