(Original Title: Interpretation of the “Announcement by the State Administration of Taxation, Ministry of Finance, People’s Bank of China, China Banking and Insurance Regulatory Commission, China Securities Regulatory Commission, and China Insurance Regulatory Commission on the Issuance of the ‘Administrative Measures for Due Diligence on Tax Information of Non-resident Financial Accounts’”)

To fulfill the international obligation of automatic exchange of tax information related to financial accounts and to standardize the due diligence practices of financial institutions regarding tax information on non-resident financial accounts, the State Administration of Taxation, the Ministry of Finance, and the People's Bank of China— Bank of China The China Banking and Insurance Regulatory Commission, the China Securities Regulatory Commission, and the China Insurance Regulatory Commission have jointly issued the “Administrative Measures for Due Diligence on Tax Information Related to Non-Resident Financial Accounts” (hereinafter referred to as the “Measures”). The following is an interpretation of key provisions of the “Measures”:

I. What is the background behind the issuance of the “Administrative Measures”?

On behalf of the Group of Twenty (G20), the Organisation for Economic Co-operation and Development (OECD) issued the Standard on Automatic Exchange of Financial Account Information (hereinafter referred to as the “Standard”) in July 2014. The Standard was endorsed at the G20 Brisbane Summit that same year, providing countries with a powerful information tool to enhance international tax cooperation and combat cross-border tax evasion. With strong impetus from the G20, currently 100 countries (and regions) have committed to implementing the “Standard.”

With the approval of the State Council, China has committed to implementing the “Standard” within the G20 framework, and the first-ever exchange of information with foreign jurisdictions is scheduled for September 2018. In July 2015, the Multilateral Convention on Mutual Administrative Assistance in Tax Matters was approved at the 15th Session of the Standing Committee of the 12th National People's Congress and entered into force for China in February 2016, thereby establishing a multilateral legal foundation for China’s implementation of the “Standard.” In December 2015, the State Administration of Taxation signed the Multilateral Agreement on Automatic Exchange of Financial Account Information among Competent Authorities, providing an operational basis for China’s mutual exchange of tax-related information on financial accounts with other countries (and regions).

The “Administrative Measures” released this time aim to translate internationally recognized “standards” into specific requirements tailored to China’s national conditions, providing a legal basis and operational guidance for the implementation of these “standards” in China. This initiative not only reflects China’s active promotion of “standard” implementation but also serves as a concrete manifestation of China’s fulfillment of its international commitments.

Second, what are the main contents of the “standard”?

The “Standard” consists of two main components: the Agreement among Competent Authorities and the Common Reporting Standard. The Agreement among Competent Authorities is an operational document that governs the automatic exchange of tax-related information on financial accounts among tax authorities of various countries (or regions). The Common Reporting Standard sets out the requirements and procedures for financial institutions regarding the identification, collection, and submission of information on accounts held by non-resident individuals and entities.

Based on the “Standard,” automated exchange of tax-related information on financial accounts begins with financial institutions in one country (or region) identifying, through due diligence procedures, individuals and enterprises that are tax residents of another country (or region) and hold accounts at such institutions. These institutions then annually report to the competent authorities of the country (or region) where they are located information including the account holder’s name, taxpayer identification number, address, account number, account balance or value, interest, dividends, and income from the sale of financial assets (excluding physical assets). Subsequently, the tax authorities of the country (or region) involved carry out an exchange of this information with the tax authorities of the account holder’s country of residence, ultimately providing informational support for cross-border tax source supervision by each country (or region). The specific process is illustrated in the figure below:

Third, what is the relationship between the “Standard” and the U.S. Foreign Account Tax Compliance Act?

In 2010, the United States enacted the Foreign Account Tax Compliance Act (FATCA), which requires foreign financial institutions to report information on accounts held by U.S. tax residents—including U.S. citizens and green card holders—to the U.S. Internal Revenue Service. Otherwise, foreign financial institutions will be subject to a punitive withholding tax of 30% when receiving certain types of income originating from the United States. FATCA primarily relies on a bilateral information exchange mechanism, under which the U.S. and other countries (or regions) conduct information exchanges based on bilateral intergovernmental agreements.

The “Standard” is a multilateral information exchange mechanism designed on the basis of the FATCA intergovernmental agreement and can be regarded as a global version of FATCA. While the “Standard” largely mirrors the content of FATCA, there are some differences in specific details, including the entities required to report, the due-diligence threshold for individual accounts, the categories of financial institutions exempt from reporting, and the penalty measures. The “Administrative Measures” are aimed at identifying non-resident accounts required by the “Standard” and do not apply to U.S. tax-resident accounts as required by FATCA. Given that our government is actively engaging in negotiations with the U.S. government regarding the FATCA intergovernmental agreement, financial institutions may consider integrating the “Standard” and FATCA at the operational level—such as consolidating their respective declaration documents according to their own business needs.

4. Which countries (or regions) have already committed to implementing the “Standard”?

It is expected that more countries (and regions) will commit to implementing the “Standard” in the future. For those countries (and regions) that have consistently refrained from committing to implement the “Standard,” the international community may adopt joint countermeasures to encourage them to make such commitments and enhance tax transparency. In the long run, the global implementation of the “Standard” is an inevitable trend, and the automatic exchange of tax-related information on financial accounts will eventually cover the vast majority of countries (and regions).

V. With which countries (or regions) will China exchange tax-related information on financial accounts?

Countries (or regions) that have committed to implementing the “Standard” will mutually select information exchange partners. A partnership can be established if both parties express mutual interest. China will establish information exchange partnerships with as many countries (or regions) as possible. For more details, please refer to the website of the State Administration of Taxation.

6. What are the principles behind the formulation of the “Administrative Measures”?

First, we must strictly adhere to the international standards. These “standards,” jointly developed by the OECD and G20 member countries, have become the new global benchmark for tax transparency. To establish a sound international tax administration order and avoid disparities in implementation levels among different countries (or regions), the international community requires all countries (or regions) to rigorously follow the provisions of these “standards” when transposing them into domestic law. Moreover, the international community will conduct international reviews of each country’s domestic legislation and enforcement practices. Therefore, the “Administrative Measures” have been formulated in accordance with the key contents of these “standards,” specifying the principles and procedures that financial institutions within China must follow to identify non-resident accounts and collect relevant information. This includes explanations of basic definitions, due diligence procedures for both individual and institutional accounts, as well as the scope of information that financial institutions are required to collect and report.

Second, we have given full consideration to the domestic reality. Given that the content of the “Administrative Measures” touches upon the day-to-day compliance work of financial institutions as well as the tangible experiences of their clients, the Measures have been repeatedly submitted to the financial authorities for extensive consultation with the financial industry. In October 2016, the Measures were also publicly released on the website of the State Administration of Taxation to solicit public comments. Guided by the principle of balancing both international and domestic needs, the “Administrative Measures” have, within the scope permitted by the “Standards,” taken into account as much as possible the demands of various domestic stakeholders, thereby reducing the compliance burden on financial institutions and minimizing the impact on customer experience.

7. What impact does the “Administrative Measures” have on the general public?

The “Administrative Measures” have relatively little impact on the general public, but will have a certain impact primarily on individuals and institutions that open new accounts at financial institutions. Starting from July 1, 2017, individuals and institutions opening new accounts at financial institutions—including deposit accounts at commercial banks and commercial insurance policies purchased from insurance companies—will be required to declare their tax residency status in the account application form or in additional declaration documents as requested by the financial institution. Since the vast majority of individuals and institutions opening accounts at financial institutions within China are Chinese tax residents, when filling out the declaration documents, they need only check the box labeled “Chinese Tax Resident,” so the account-opening experience will not be significantly affected. If these individuals and institutions have already opened accounts prior to this date, when they open new accounts at the same financial institution after July 1, 2017, they generally will not need to re-declare their tax residency status; instead, the financial institution will confirm their tax residency status based on the records it already holds.

For accounts opened before July 1, 2017, financial institutions will confirm the tax residency status of account holders based on the documentation they have on file. In the very rare cases where confirmation cannot be made, individuals and institutions will need to cooperate by providing additional materials.

8. Who will be most affected by the “Administrative Measures”?

The “Administrative Measures” primarily have a significant impact on non-residents or passive non-financial institutions that are controlled by non-residents and have accounts opened within China. For the purposes of these Measures, “non-resident” refers to individuals and enterprises (including other organizations) that are not tax residents of China, but excludes government agencies, international organizations, central banks, financial institutions, companies listed and traded on securities markets approved and regulated by the local government, as well as their affiliated entities.

Non-residents or passive non-financial entities with non-resident controllers are required to complete in detail the tax residency status declaration form for the account holder or controller when opening a financial account. This form should include information such as the name (or corporate name), current residential address, country (or region) of tax residency, taxpayer identification number of the country (or region) of residence, place of birth, and date of birth, and the information provided must be true and accurate.

After the above-mentioned information is reported to the relevant authorities, the State Administration of Taxation will exchange it with the tax authorities of the account holder’s country of residence in accordance with the agreements China has signed with foreign countries.

9. What is a passive non-financial institution?

If a non-financial institution derives most of its income from passive activities such as dividends, interest, rents, and royalties, it is considered a Passive Non-Financial Entity—for example, an intermediate holding company established in a tax haven that holds only equity interests in its subsidiaries. Since Passive Non-Financial Entities are prone to being used as vehicles for cross-border tax evasion, financial institutions are required to identify these entities as well as their ultimate beneficial owners. If the controlling person of a Passive Non-Financial Entity is a non-resident, the financial institution must collect and report information about that controlling person.

10. Why do account holders need to complete the tax residency status declaration form?

The “Administrative Measures” adopt the concept of tax residency, which differs from the concept of residency used in residence management regulations. The criteria for determining tax residency are relatively complex and cannot be directly established based on ordinary resident identification documents. Therefore, individuals and institutions opening accounts must independently declare their tax residency status. Individuals and institutions opening accounts shall cooperate with financial institutions’ due diligence efforts, truthfully, promptly, accurately, and completely fill out the tax residency declaration form, provide the relevant materials specified in the “Administrative Measures,” and bear the legal responsibilities and risks arising from failure to comply with these requirements.

11. How can account holders determine their tax residency status?

The criteria for determining tax residency under each country’s (or region’s) domestic law are not uniform. For individuals, the residence (domicile) criterion and the duration-of-stay criterion are typically applied concurrently; as long as a taxpayer meets either of these criteria, they can be considered a tax resident of that country (or region). For enterprises, the registration location criterion and the criterion based on the location of the management body are usually adopted.

Take China as an example. According to China’s tax laws, a Chinese tax-resident individual refers to a person who has a domicile within China or, even if without a domicile, has resided in China for a full year (having a domicile within China means habitually residing there due to household registration, family ties, and economic interests). A Chinese tax-resident enterprise refers to an enterprise established within China in accordance with the law, or an enterprise established under foreign (regional) law but whose actual management body is located within China (including other organizations).

Account holders should make a comprehensive assessment of their tax residency status based on their actual circumstances and in accordance with the relevant tax residency identification rules of the country (or region) concerned. The website of the State Administration of Taxation will publish relevant materials for reference by financial institutions and account holders (http://www.chinatax.gov.cn/aeoi_index.html). Account holders may also consult professional tax advisors to determine their tax residency status.

12. Will account information of Chinese tax-resident individuals be reported and exchanged?

If the account holder is an individual who is a Chinese tax resident, the financial institution will neither collect nor report relevant account information, nor will it exchange such information with other countries (or regions). If the account holder is simultaneously a tax resident of China and a tax resident of another country (or region), the account information held within China will be exchanged with the tax authorities of the respective tax-resident country (or region), while the account information held outside China will be exchanged with the State Administration of Taxation.

13. What does “due diligence” as referred to in the “Administrative Measures” mean?

The due diligence referred to in the “Administrative Measures” is not a general investigation in the conventional sense; rather, it refers to the process by which financial institutions, following prescribed procedures, ascertain the tax residency status of account holders or relevant controlling persons, identify non-resident financial accounts, and collect and record relevant account information. Over the years, financial institutions have already carried out similar customer identification activities—under the requirements of the relevant authorities—for the purpose of anti-money-laundering, thereby laying a solid foundation for implementing the “Administrative Measures.”

14. Which financial institutions are required to conduct due diligence in accordance with the “Administrative Measures”?

The financial institutions defined in the “Administrative Measures” differ from those typically understood in everyday economic life. For example, a company may be classified under the “financial industry” according to the national economic industry classification, but it does not necessarily qualify as a financial institution as defined in the “Administrative Measures.”

Financial institutions—such as deposit-taking institutions, custodian institutions, investment institutions, and specific insurance institutions—that are established within the territory of China in accordance with the law are required to conduct due diligence in compliance with the provisions of the “Administrative Measures.” The relevant definitions are specifically explained and listed in the “Administrative Measures.”

Financial asset management companies, finance companies, financial leasing companies, auto finance companies, consumer finance companies, currency brokerage firms, securities registration and settlement institutions, and other institutions that do not meet the relevant criteria are not considered financial institutions under the “Administrative Measures” and therefore are not required to conduct due diligence.

15. Which accounts fall within the scope of due diligence stipulated in the “Administrative Measures”?

Starting from July 1, 2017, financial institutions within China will conduct due diligence on deposit accounts, custody accounts, equity or debt interests held by investment entities, as well as insurance contracts or annuity contracts with cash value. Regardless of the account amount, these accounts must be subject to due diligence to determine whether the account holder is a non-resident.

In practice, certain financial accounts carry a lower risk of being used for cross-border tax evasion. Therefore, in line with international standards, the “Administrative Measures” also specify certain accounts that are exempt from due diligence requirements—for example, eligible pension accounts, social security accounts, term life insurance contracts, dormant accounts, and other accounts that meet the relevant criteria. The specific conditions for these exemptions are detailed in the “Administrative Measures.”

16. Are the due diligence procedures the same for all types of accounts?

The “Administrative Measures” classify accounts into two categories: individual accounts and institutional accounts. Each category is further divided into newly opened accounts and existing accounts. The due diligence requirements and procedures differ depending on the account category. Simply put, the due diligence requirements for newly opened accounts are relatively stricter; account holders must provide documents declaring their tax residency status, and financial institutions conduct a reasonableness review based on the account-opening information provided. The due diligence procedures for existing accounts are relatively simpler—financial institutions primarily rely on the information already retained to carry out their checks. Financial institutions that meet certain conditions may choose to apply the due diligence requirements for newly opened accounts to existing accounts as well. For specific requirements, please refer to the table below.

Account Category			Description	Due diligence procedures	Time requirements
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