China’s scrutiny of offshore insurance income is forcing a rethink of return advantages for Hong Kong policies, which could weaken the appeal of dividend and savings products
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Hong Kong insurance policies have long been popular with Mainland Chinese, offering higher long-term returns, multi-currency options and access to globally diversified investments beyond traditional protections. But now this cross-border insurance business faces another cost that customers will have to factor into their calculations: personal income tax on offshore insurance income.
The issue surfaced on Aug. 5, when Chinese media reported that tax authorities in Beijing, Hangzhou and other cities had begun reviewing offshore insurance policies held by Chinese residents, including policies issued in Hong Kong. Some policyholders were reportedly required to pay a 20% personal tax on income such as policy dividends and interest earned on prepaid premiums.
Subsequent reports indicated that realized gains from policy surrenders, reductions in coverage and dividend withdrawals could also fall within the tax net. China’s State Taxation Administration responded on Aug. 7 by saying the requirement for Chinese residents to declare and pay tax on overseas income has long been in place, stressing that the enforcement was “not a new policy” and was not specifically targeting Hong Kong’s insurance market.
Cross-border wealth management edge
But it is precisely this return advantage that a 20% tax would erode first.
How much of the return gap will remain?
More important is whether tax authority scrutiny now seen in individual Chinese cities develops into broader enforcement. If such enforcement gradually becomes routine, the tax cost of offshore policies will become a standard part of the purchase calculus for Mainland customers.
In the short term, taxation alone may not be enough to reverse the flow of Mainland customers buying insurance in Hong Kong. But if taxation of offshore policies becomes routine across China, dividend and savings products marketed primarily on their higher returns will face growing pressure. The real test is whether Hong Kong products can retain a sufficiently large return advantage over their Mainland counterparts after tax costs are taken into account.
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Benzinga Disclaimer: This article is from an unpaid external contributor. It does not represent Benzinga’s reporting and has not been edited for content or accuracy.