ancialCRSCRS "In order to further assist you in fulfilling your tax obligations in accordance with the law and to avoid tax risks, the tax authorities remind you to review your domestic and foreign income and tax declaration situation based on your own circumstances, and to verify whether the reported income types, income amounts, expense deductions, exemptions, and other contents are true, accurate, and complete. If you have also received such a text message, it is not a fraudulent message, but rather a proof of identity as a "high net worth individual." Since the beginning of this year, many Hong Kong and US stock investors have received notifications about supplementary taxation on overseas investment returns, and a self-examination and supplementary taxation campaign targeting Hong Kong and US stock investment returns of Chinese residents is gradually being rolled out in various parts of the country. In fact, in addition to overseas investment returns, the types of income covered by this round of self-examination notifications also include overseas interest income, overseas property transfer income, and overseas employment income, targeting various types of overseas income of Chinese tax residents. So, why have Chinese tax residents received little supplementary taxation notices in the past despite having overseas income for a long time? This can be traced back to the global implementation and implementation of the FATCA and CRS mechanisms. At the third "Xin Zhi Roundtable - US Dollar Fund Closed-Door Meeting" jointly organized by New Wisdom Fund Network and NuBright Fund Administrator, Huang Zhonghao, a partner at KPMG Enterprise Consulting (China) Co., Ltd., delivered an in-depth analysis on the topic of "FATCA & CRS Progress and Compliance Requirements for Financial Institutions," discussing the development history of FATCA and CRS, their key impacts on investors, and compliance requirements for fund managers. FATCA & CRS: Two major international tax compliance frameworks leading the global tax era According to New Wisdom Fund Network, FATCA and CRS are both Automatic Exchange of Information (AEOI) systems, products of global tax transparency and international anti-tax evasion cooperation, aimed at combating the behavior of hiding assets overseas to evade domestic taxes through the cross-border automatic exchange of tax information on financial accounts. FATCA (Foreign Account Tax Compliance Act) was signed by Obama in 2010 and came into effect in 2014, establishing a compliance and reporting system that requires foreign institutions to identify and disclose financial accounts held by US persons overseas. FATCA requires global financial institutions to identify and report overseas account information of US tax residents (including green card holders), with the aim of tracking undeclared overseas assets and income. CRS (Common Reporting Standard) is seen as the globalization extension of FATCA, in simple terms, it is a global version of the "information exchange mechanism" used to guide participating jurisdictions to collect financial account information based on uniform principles and standards and to exchange it regularly. Since the introduction of CRS by the Organization for Economic Cooperation and Development (OECD) in 2014, more than 110 countries and regions have signed CRS agreements, covering the vast majority of major economies. According to Huang Zhonghao, China officially implemented CRS in September 2018, and by the end of 2018, the State Administration of Taxation had begun exchanging information with participating countries. From 2019 to 2024, China had accumulated complete annual information for 5 years. In the past, due to insufficient international information exchange and networking, the enforcement of tax management on residents' individual overseas investments had long been in a state of "weak enforcement." However, in recent years, with the improvement and implementation of the CRS mechanism, increasing the enforcement of global taxation has become a trend. Under CRS supervision, private equity funds face new compliance challenges According to Huang Zhonghao's explanation to the New Wisdom Fund Network, currently, CRS mainly defines four types of financial institutions, including deposit institutions, custody institutions, investment institutions, specific insurance institutions, and their branches. Among them, meeting one of the following three conditions will be considered an investment institution under the CRS regulations: 1. Institutions whose income from investing and operating financial assets for clients accounts for over 50% of the total income in the past three fiscal years; 2. Institutions whose income from investing, reinvesting, or trading financial assets accounts for over 50% of the total income in the past three fiscal years, and are managed and make investment decisions by deposit institutions, custody institutions, specific insurance institutions, or the first category of investment institutions mentioned above; 3. Investment entities established with the purpose of investing, reinvesting, or trading financial assets, such as securities investment funds and private equity funds. As a result, partnership-based funds and private equity funds are classified as financial institutions under CRS regulations, and are required to comply with CRS specifications by conducting due diligence on accounts, establishing compliance monitoring frameworks, continuously tracking and assessing the implementation of compliance requirements, detecting problems promptly, and correcting them. According to CRS standards, private equity funds need to collect tax resident identity declarations from all LPs and conduct due diligence on continuing LP accounts. It is worth mentioning here that the four types of financial accounts within the scope of CRS include: deposit accounts, custody accounts, investment interests, cash value insurance, and annuity contracts. In addition, equity or debt interests in investment institutions, such as partnership interests in private equity funds and beneficial rights in trusts, are classified as financial accounts affected by CRS regulations. According to Huang Zhonghao, in order to meet the compliance requirements under the CRS framework, private equity funds and their fund managers need to establish comprehensive compliance systems: regularly conduct account identification, due diligence, information reporting, continuously monitor changes in accounts, and promptly reconfirm customer identities after knowing about changes in customer information, submit CRS information reports to relevant regulatory authorities before May 31 each year, and submit written reports to relevant industry supervisory departments and the State Administration of Taxation before June 30 each year. Furthermore, for non-resident accounts and passive non-financial accounts, additional due diligence and information reporting obligations must be fulfilled in accordance with CRS regulations. Therefore, private equity funds should actively respond to the upgraded CRS supervision, enhance compliance capabilities, and ensure compliance with international tax compliance requirements."The identification of the ultimate controller of financial institutions has become a key focus under the CRS regulatory framework. It is worth noting that if an institution launches a US dollar fund overseas, it also needs to comply with both FATCA and CRS frameworks simultaneously.Three types of people may face CRS compliance impact As an automatic information exchange system, CRS does not directly levy taxes, but assists tax authorities in various countries in supervising tax residents through the exchange of cross-border financial account information. Subsequently, tax authorities in various countries obtain overseas financial account information through CRS, compare it with taxpayers' declarations, and if there are discrepancies, they may recover unpaid taxes. At the same time, when traditional offshore structures (such as Cayman funds + BVI shell companies) are penetrated by CRS, resulting in the ultimate beneficiary being unable to be hidden, the resident country may also be able to tax undistributed dividends and capital gains. Therefore, from the actual impact of CRS, in China, there are mainly three types of people who may be affected by CRS information exchange: 1. Non-residents: Individuals outside China who are not tax residents in China, or companies outside China who are not tax residents in China. Resident individuals: Individuals who have a residence in China or who have resided in China for a total of 183 days within a tax year without a residence. Resident companies: Enterprises legally established in China or enterprises established in accordance with foreign (regional) laws but with actual management in China. 2. Passive non-financial institutions with non-resident controllers: Refers to institutions where in the previous calendar year, dividends, interest, rents, royalties (excluding rents and royalties generated by trade or other substantive operating activities), and income from the transfer of related properties accounted for over 50% of total income; or institutions where assets owned at the end of the previous calendar year that can generate the above income accounted for over 50% of total assets; or investment institutions in tax resident countries (regions) that do not implement automatic exchange of financial account tax information standards. 3. Dual/multi-tax residents: Individuals or companies who are both tax residents in China and tax residents in other tax jurisdictions are also considered non-residents and must be marked as residents of all tax jurisdictions, which may trigger double taxation or even multiple taxation (CRS does not exempt dual/multiple identities, and information will be exchanged synchronously with relevant tax jurisdictions). For passive non-financial institutions, private equity funds still need to penetrate multiple layers of structures to identify the ultimate beneficial owners to avoid reporting loopholes for passive income LPs. If institutional investors are classified as passive non-financial institutions, the information of the ultimate beneficial owners behind them will be reported. High-net-worth individuals who do not report overseas income may be subject to tax audits. The world is entering an era of transparent taxation According to the Organisation for Economic Co-operation and Development (OECD), as of April 2024, more than 120 countries and regions have committed to implementing automatic information exchange. This includes not only Hong Kong and Singapore, where high-net-worth Chinese people are concentrated, but also all traditional tax havens such as the Cayman Islands, BVI, Bermuda, Switzerland, and others. In this framework, for financial institutions, banks, and funds operating in participating countries must fulfill CRS obligations to identify the tax resident countries of account holders; for investors, individuals or companies, financial account information in CRS countries will be automatically exchanged to their tax jurisdiction, thereby increasing the possibility of being subject to local tax audits. At this point, more than 120 countries and regions around the world have collectively established a tax transparency network covering nearly 90% of the global economy. As the global tax transparency process accelerates, the CRS information exchange mechanism continues to deepen, traditional tax havens are no longer "safe", and the "global tax new era of cross-border transparent global asset account information" is emerging.