Recently, a large number of practitioners engaged in cross-border business and with offshore income have been receiving notices from tax authorities, being reminded toBack taxes on foreign investment income.Many practitioners have raised questions? Why overseas deposits are detected by tax authorities, why they have not violated the law but have been the focus of tax attention, and the scope of income subject to tax outside the country. This is not a surprise check on individuals, but the inevitable result of the fifth round of CRS information exchange and the four-phase linkage of the Golden Tax.

First things first, what is CRS?

CRS is a global unified tax information exchange system led by OECD, which has been joined by more than 120 countries and regions, covering Hong Kong, Singapore, Cayman Islands, Switzerland and other commonly used areas for cross-border business. The core purpose is to eliminate cross-border tax evasion through the exchange of information among tax authorities of various countries. Its operation logic is "Global Tax Information Relay", in which the information of Chinese tax residents' offshore financial accounts will be collected by local financial institutions and automatically exchanged to the State Administration of Taxation of China through the CRS mechanism by the local tax bureaus. What's more, the offshore information has been connected with the one-person file of Golden Tax Phase IV, and the flow of funds and incomes inside and outside the country have been completely linked, so the idea of "invisibility when money is deposited overseas" is no longer valid.

What does the CRS look for?

Common misconceptions about CRS include that "all transactions will be scrutinized" and "small amounts of money won't be looked at," when in fact the scope of information exchange is clearly defined.

The information that will definitely be exchanged consists of three categories:

1. Identifying information, such as name, taxpayer identification number, and place of residence, is used to identify the subject of supervision;
2. Account information, such as account number and account type, identifies where the funds are held;
3. Account year-end balances, interest, dividends, investment income, and other earnings information for tax purposes.

It is important to note that CRS does not check transaction-by-transaction flow, but does verify annual aggregated earnings.

The cases that will not be investigated fall into two categories:

1. Non-financial assets such as overseas properties, jewelry, etc., but the proceeds from rentals, sales, etc., of such assets are indirectly verified through bank accounts;
2. Pure consumption insurance such as Hong Kong critical illness insurance and cashless life insurance are exempted from personal tax as they do not involve investment income, do not participate in information exchange and are exempted from personal tax on claim payments.

Who's going to be investigated?

The scope of CRS regulation has sunk to small accounts, with the core determination criteria being "Whether you are a tax resident of China", which is not related to the possession of an overseas permanent residence or passport, but is based primarily on the residence criterion and the 183-day rule, either of which is satisfied by the payment of tax on worldwide income:

• Residence standards: Family, real estate, major business in the country;
• 183-day rule: Residence in the country for 183 days in a tax year.

Cross-border people who are vulnerable to detection:

Cross-border e-commerce/foreign trade practitioners, offshore investors, beneficiaries of cross-border labor and offshore structures, offshore asset holders.

It is worth noting that the accurate screening capability of "CRS+Golden Tax IV" can cover small amounts of income, and even small amounts of foreign earnings may be reminded to pay back taxes.

Why are Hong Kong accounts vulnerable?

Most of the practitioners who receive tax reminders use Hong Kong bank or brokerage accounts, which stems from Hong Kong's special positioning as a core node for information exchange:

1. As a natural transit point for cross-border funds, Hong Kong is often used as a funding hub because of its lack of exchange controls and the flexibility of funds in and out of the territory, and its high-frequency fund flows make its data easy to be screened;
2. Hong Kong financial institutions have strict requirements on customer identification (KYC) and tax declaration, and the reported information is standardized and complete, which is easily recognized and matched by the domestic tax system;
3. As a Special Administrative Region of China, Hong Kong has a smooth information exchange channel with the Mainland, and the 2025 data shows that its CRS information exchange accuracy rate of 98% is much higher than that of other regions.

6 Common Misconceptions About the CRS

There are 6 common misconceptions about CRS perception among cross-border practitioners:

❎ "Compliance = more money", actual compliance can optimize costs through mechanisms such as tax credits, non-compliance is extremely costly;

❎ Ignore the value of Hong Kong as a transit point to the sea, with its significant advantages of foreign exchange freedom, tax incentives, and simplicity of process;

❎ "Once the structure is in place, it's done"; business growth needs to be synchronized with adjustments to the compliance structure;

❎ "Money is safe when it's transferred to the U.S." The U.S. is not a member of the CRS, but has an information exchange agreement with China through FATCA;

❎ "Offshore companies can avoid detection" and shell offshore companies will be penetrated to verify the actual controller;

❎ "Close the offshore account and you'll be fine" The bank will report the account balance and annual earnings before the account was closed.

What should I do if I receive back taxes?

Receiving a back tax notice is a three-step process, and proactive compliance is key.

The tax authorities will first guide the compliance through "prompting reminders, urging rectification", and the active treatment is better than filing an audit, which can be divided into three steps:

1. Assemble a package of evidence, including offshore account flows, tax clearance certificates, investment or trading contracts, etc., where offshore tax clearance certificates can be used to claim tax credits;
2. Calculate the amount of tax payable, passive income is taxed at 20% tax rate, active income is taxed at "business income" (5%-35% tax rate), foreign losses need to be declared truthfully, and cannot be offset against the domestic profits; when making up for the losses with foreign profits, you can choose to account for the losses 'by country and not by item' or 'by country and not by item' (in accordance with the regulations of the tax authorities). When making up for the loss of foreign profits, you can choose the accounting of 'by country without itemization' or 'by country without itemization' (in accordance with the regulations of the tax authorities);
3. Active declaration of retroactive payment can be done through personal tax APP or tax service office, disagreement on the amount can apply for administrative reconsideration, complex asset structure is recommended to consult professionals.

CRS and Golden Tax IV have built a cross-border tax transparency network. Tax avoidance is not feasible and compliance is the bottom line of cross-border operations. Cross-border practitioners need to confirm their tax residency status, sort out their offshore accounts and incomes, and file returns on time. Complex asset structures can be optimized with the help of Hong Kong's tax advantages and bilateral tax treaties. If you encounter any difficulties in cross-border tax compliance, such as identity determination, tax accounting, structure optimization, etc., please feel free to contact us for professional support and customized solutions.