How High-Net-Worth Individuals Can Ensure Tax Compliance in the CRS 2.0 Era

Editor's Note:

Recently, many Chinese tax residents have received pop-up notifications on their Individual Income Tax (IIT) APP. The tax authorities, through big data analysis, identified that they may have derived income from outside China during the selected tax year and reminded them to declare foreign-sourced income in accordance with the law when handling the comprehensive income final settlement. This pop-up notification has once again sparked widespread attention among Chinese tax residents regarding the Common Reporting Standard (CRS). In view of this, this article starts by observing the collection and management environment for foreign-sourced income, sorts out the evolution process and latest implementation progress of CRS, with a view to providing useful suggestions for tax compliance of Chinese tax residents.

I. Observation on the Collection and Management Environment for Chinese Tax Residents Obtaining Foreign-Sourced Income

According to the 2025 fiscal revenue and expenditure data, China's individual income tax in 2025 reached 1.6187 trillion yuan, an increase of 11.5% over the previous year. According to the first quarter fiscal revenue and expenditure data of 2026, China's individual income tax in the first quarter of 2026 was 501.8 billion yuan, a year-on-year increase of 10.5%. This growth rate is significantly higher than the 2.2% growth rate of national tax revenue in the first quarter and also higher than the 7.1% growth rate of individual income tax in the first quarter of last year. The sustained high growth of individual income tax revenue is closely related to the tax authorities' strengthened collection and management efforts on foreign-sourced income of Chinese tax residents.

Since 2025, tax authorities in multiple regions have successively issued announcements to handle Chinese tax residents who failed to declare foreign income, comprehensively applying the "five-step work method" of "prompt and reminder, supervision and rectification, interview and warning, case filing and inspection, and public exposure" to urge them to pay back taxes and late payment surcharges, with nearly 30 million yuan in recovered taxes and late payment surcharges. Since 2026, many Chinese tax residents have still received telephone notifications from tax authorities, requiring them to conduct self-examination and pay supplementary taxes on foreign-sourced income obtained.

Meanwhile, during the individual income tax final settlement period, many Chinese tax residents received pop-ups on the Individual Income Tax APP reminding them to declare foreign-sourced income in accordance with the law. In addition, some Chinese tax residents received the "Tax Matters Notice" issued by the tax authorities, informing them of the failure to truthfully declare individual income tax and requiring them to truthfully submit supporting materials for foreign-sourced income obtained and handle corrected tax declarations.

The tax authorities precisely obtain the foreign financial account information of Chinese tax residents through the CRS mechanism, and accordingly require taxpayers to fulfill their tax obligations in accordance with the law and truthfully declare foreign-sourced income. On April 1 this year, at the regular press conference of the State Administration of Taxation, the Director-General of the Policy and Regulation Department of the State Administration of Taxation reminded Chinese tax residents that "income derived by resident individuals from both within and outside China shall be subject to individual income tax in accordance with the law. Taxpayers with foreign-sourced income must complete the declaration on all domestic and foreign income by the end of June. The tax department will use CRS and other information data to analyze and compare foreign-sourced income declaration data and continuously strengthen tax supervision." It can be foreseen that the tax authorities will use the CRS mechanism to continuously pay attention to the financial account information of Chinese tax residents, whether they have obtained foreign-sourced income, and whether they have truthfully declared and paid taxes on foreign-sourced income obtained. Those who fail to truthfully declare will be dealt with and punished in accordance with the law.

II. What Changes Have Occurred in CRS 2.0 Released by the OECD?

CRS is a cross-border automatic exchange mechanism for tax-related information released by the OECD in 2014 to strengthen transnational tax cooperation, improve tax transparency and combat cross-border tax evasion. Subsequently, each contracting state completed its own tax information exchange legislation with reference to it and carried out information exchange work accordingly. In December 2015, with the approval of the State Council, the State Administration of Taxation of China signed the "Multilateral Competent Authority Agreement on Automatic Exchange of Financial Account Information". In September 2018, the State Administration of Taxation completed the first information exchange with competent authorities of other jurisdictions. Up to now, China has realized financial account data exchange with more than 100 countries and regions around the world.

CRS has provided a powerful tool for contracting states to combat cross-border tax evasion and strengthen tax collection and management. However, with the development of economic forms and financial technology, CRS has also exposed some problems in practice. For example, crypto-assets have long been in a regulatory blind spot, there is room for arbitrage in dual tax resident status, and the penetration of offshore structures is insufficient. To solve new problems arising in practice, in June 2023, the OECD released CRS 2.0, which revised the original CRS and strengthened information exchange. The main revisions of CRS 2.0 include three aspects:

First, expanding the specific scope of information exchange. Specifically, this includes incorporating certain new types of financial assets such as electronic money products and central bank digital currencies into the reporting scope, and introducing the Crypto-Asset Reporting Framework (CARF). In the past, reportable financial accounts mainly included deposit accounts, custodial accounts, equity or debt interests in investment entities, and insurance contracts and annuity contracts with cash value. As crypto-assets have gradually become favored by high-net-worth individuals for investment, and crypto-assets are more concealed, providing convenience for cross-border tax evasion, the OECD has formed a crypto-asset reporting framework and incorporated crypto-assets into the objects of automatic information exchange.

Second, strengthening due diligence rules. Specifically, this includes strengthening the identification and declaration of dual tax resident status. For example, a natural person who has tax resident status in both Country A and Country B may only be identified as a tax resident of Country B by financial institutions in Country B, and their account information will not be declared to the competent tax authority. CRS 2.0 requires that for multiple tax resident statuses, all countries that may have the right to tax them must be fully identified and declared, and selective declaration is not allowed.

Third, strengthening the penetration and identification of passive non-financial entities. If a financial institution in a country finds that most of the income obtained by the account-holding institution is passive income such as dividends, interest, rent, and royalties, this institution constitutes a passive non-financial entity, and it is necessary to further identify its actual controller. If the actual controller is a tax resident of another country, the information of the actual controller and the account information of the passive non-financial entity must be declared to the competent tax authority together, and the information exchange will be further completed. The design of hidden shareholding structures through multi-layer nesting models may be penetrated to the top-level actual controller, making it difficult to evade information exchange.

III. Progress of CRS 2.0 Legislation in Hong Kong

In response to changes in CRS, contracting states are improving their domestic legislation to varying degrees to respond to CRS 2.0. As an international financial and trade center, Hong Kong has been cooperating with international efforts to enhance tax transparency and combat cross-border tax evasion. Since 2018, Hong Kong has automatically exchanged financial account information with partner tax jurisdictions annually in accordance with the CRS formulated by the OECD to detect and combat tax evasion.

In 2024, the OECD launched the second round of mutual evaluation of members on Hong Kong's implementation of CRS. After considering the OECD's opinions, Hong Kong published the "Taxation (Amendment) (Automatic Exchange of Information) Bill 2026" in the Gazette on March 27, 2026 to optimize the relevant administrative framework. The Bill was submitted to the Legislative Council for consideration on April 1 this year and will take effect on January 1, 2027. This is an important legislative process for Hong Kong to implement CRS 2.0, and it also means that CRS is ushering in a new round of upgrading against the background of deepening global tax transparency. The main revisions of the Bill include three aspects:

First, mandatory registration of reporting financial institutions with the Inland Revenue Department. In the past, although reporting financial institutions had CRS due diligence and reporting obligations, many financial institutions did not register. The Bill requires all reporting financial institutions in Hong Kong, regardless of whether they need to declare information to the Hong Kong Inland Revenue Department, to register on the Hong Kong Automatic Exchange of Information website. For reporting financial institutions that have not yet registered, they are required to register before March 31, 2027; for newly established reporting financial institutions after January 1, 2027, they are required to register before January 31 of the following year of establishment.

Second, optimizing the provisions on keeping due diligence records. The Bill stipulates that even if a reporting financial institution ceases to be a reporting financial institution or has been dissolved, it must still keep due diligence records and statement records for 6 years. At the same time, if there is a change of address, change of identity, dissolution of entity, etc., the Inland Revenue Department must be notified within 1 month. It should be noted that for dissolved reporting financial institutions, before dissolution, the directors (or trustees or administrators if there are no directors) must ensure that the records of the reporting financial institution are fully kept until the 6-year retention period expires. This means that directors, trustees or administrators personally need to retain the due diligence records and statement records of the reporting financial institution.

Third, introducing an administrative penalty mechanism. The Bill introduces an administrative penalty mechanism to replace criminal prosecution procedures. For general violations of reporting financial institutions (such as failure to register, failure to declare, provision of incorrect information, etc.), in the absence of prosecution, the Inland Revenue Department may impose monetary penalties instead of criminal prosecution procedures. Penalty assessment must be made by the Commissioner or Deputy Commissioner, and a notice must be issued to the financial institution in advance, explaining the facts of the violation and the proposed penalty to ensure procedural fairness. This mechanism helps to improve law enforcement efficiency and cost-effectiveness. At the same time, the Bill introduces penalties calculated based on the number of financial accounts involved. For different violations, gradient fines of $1,000, $5,000, $10,000, and $20,000 per account are set, and the higher one is implemented with fixed-level fines to ensure that penalties are commensurate with the nature and severity of the offense.

Overall, although the Bill does not involve revisions to the substantive rules of CRS but rather modifications to the administrative law enforcement framework, this change can effectively guarantee the implementation of CRS in Hong Kong and provide institutional preparation and foundation for the subsequent implementation of CRS 2.0 in Hong Kong. Chinese tax residents need to focus on and continuously observe the new progress of subsequent CRS legislation in Hong Kong to ensure sufficient time for tax compliance.

IV. How Chinese Tax Residents Should Ensure Tax Compliance

Against the background of continuous improvement in global tax transparency, with the implementation of CRS 2.0 and the advancement of the legislative process of the relevant Bill in Hong Kong, China's tax authorities are relying on international tax cooperation to continuously strengthen supervision over foreign-sourced income. Chinese tax residents should fully ensure tax compliance.

(A) Accurately Clarify One's Own Tax Resident Status

According to international practice, the tax resident country usually exercises global taxation power over its tax residents, while the taxation power of the income source country is often relatively limited and can only tax income derived from it. Therefore, the determination of tax resident status is directly related to the division of taxation power. Due to differences in the identification standards for tax resident status among countries, it is recommended that Chinese tax residents conduct in-depth research on the domestic tax laws of the countries involved, carefully study and judge their identity attribution, and focus on avoiding tax-related risks such as double taxation and dual supervision brought about by dual tax resident status.

(B) Accurately Determine the Taxable Nature of Foreign-Sourced Income

Different types of income differ in applicable tax rates, tax calculation methods, declaration procedures, etc., and there may be significant differences in tax obligations. At the same time, since the boundaries of some income are relatively vague, it is easy to trigger tax-related disputes, which requires special attention. For example, income generated from providing independent personal services such as medical treatment and lectures abroad may be classified as income from labor remuneration or income from business operations. The former applies a tax rate of 3% to 45%, deducts the statutory proportion when calculating tax, and is settled according to comprehensive income, while the latter applies a tax rate of 5% to 35%, deducts actually incurred costs and expenses when calculating tax, and is declared independently according to business income.

(C) Strictly and Truthfully Declare and Pay Taxes in Accordance with the Law

Chinese tax residents who obtain foreign-sourced income shall truthfully make tax declarations, which not only emphasizes the timeliness of declaration but also the objectivity and truthfulness of the declaration. Those who fail to make tax declarations in a timely manner may face administrative legal risks for non-declaration. Those who have made tax declarations but have not declared and paid taxes objectively and truthfully may also constitute tax evasion through false tax declarations, facing not only administrative legal risks but also criminal legal risks for the crime of tax evasion.

(D) Resolve Tax-Related Disputes at an Early Stage

At present, after discovering clues of foreign-sourced income tax avoidance or tax omission, the tax authorities usually do not directly adopt rigid law enforcement procedures such as case filing and inspection, but first start with flexible law enforcement methods such as prompting, supervision, and interviews to avoid excessive intensification of conflicts with taxpayers. Therefore, Chinese tax residents should seize the opportunity to resolve tax-related disputes at an early stage. For complex situations such as difficult definition of tax resident status, vague determination of the nature of foreign-sourced income, and doubts about the application of cross-border credit rules, it is recommended to rely on professional tax forces to complete tax declarations and data reporting to avoid the expansion of tax risks.