1 Life Insurance
- Types of life insurance
Death insurance: refers to life insurance for which payment is conditioned upon the death of the insured. Specifically, death insurance may be classified as either fixed-term life insurance (term death insurance) or whole life insurance (non-term death insurance).
Fixed-term life insurance (term death insurance): refers to life insurance that provides an insurance benefit payment to beneficiaries of the policy if the insured dies within a specified term. The insurance contract will terminate if the insured lives beyond the expiration of the insurance term, and the insurer is neither obligated to pay insurance benefits nor refund the premiums already paid.
Whole life insurance (non-term death insurance): refers to life insurance for which payment is conditioned upon the death of the insured and the relevant term of the policy is the whole lifetime of the insured. The insurer is obligated to pay insurance benefits at the death the insured, no matter when the death occurs.
Survivorship insurance (annuity insurance): refers to life insurance for which payment is conditioned upon the survival of the insured. That is, the insurer is obligated to pay insurance benefits to beneficiaries if the insured is alive at the expiration of the insurance period or at the time when the insured reaches to a specified age.
Endowment insurance: refers to life insurance for which the insurer is obligated to pay insurance benefits regardless of whether the insured dies during the insurance period or survives until the expiration of the insurance policy. Endowment insurance premiums are composed of risk premiums and savings premiums. Risk premiums are used to cover payments for death occurring during the insurance period, while savings premiums are accumulated year by year to establish a liability reserve, which can be used either for payment of surrender value when the insured surrenders the policy, or for payment of the survivorship benefit.
- Insurance trusts
As the name implies, insurance trusts are the combination of insurance and trust. Upon the occurrence of a payment event as agreed between the policyholder and the insurance company (for example, the death of the insured), the insurance company will pay the insurance benefits to a trust company in order to settle a family trust. Generally, the settlor of the family trust is the insured (e.g., the original policyholder). The trust company will act as a trustee to operate and manage the trust assets and to distribute the trust proceeds to beneficiaries in accordance with the terms of the trust, so as to enable the succession of family wealth from generation to generation.
- Do insurance benefits constitute part of the estate
According to Article 42 of the Insurance Law of the People’s Republic of China(“Insurance Law”), in the case of the death of the insured, the insurance benefit shall form part of the insured party's estate, and the insurer shall perform the obligation of payment of insurance benefit pursuant to the provisions of the Succession Law:
no beneficiary is designated or the designation of beneficiary(ies) is unclear and cannot be ascertained;
the beneficiary is survived by the insured party, and there is no other beneficiary; or
The beneficiaries have lost or waived their rights as beneficiaries, and there are no other beneficiaries.
If the beneficiary and the insured die in the same event and sequential order of death cannot be determined, the death of the beneficiary is presumed to have occurred first.
- Can insurance beneficiaries be changed by making a will
According to Article 10 of the Interpretations of the Supreme People's Court on Issues Concerning the Application of the Insurance Law of the People's Republic of China (III), the beneficiaries of an insurance policy may be changed by creating a will, provided that proper notification of the change is sent to the insurance company.
- Taxation of life insurance
If we interpret Article 42, Section 1, Clause 1 of the Insurance Law reversely, it indicates that so long as insurance beneficiaries are alive, the insurance benefits will not be treated as estate of the insured. Thus, the insurance benefits may not be subject to inheritance taxes even if an inheritance tax law will be promulgated in the future.
Article 4 of the Individual Income Tax Law of the People’s Republic of China (“Individual Income Tax Law”) stipulates that insurance benefits are not subject to individual income tax, thus exempting insurance benefits from individual income taxation. At present, although there are no existing rules regarding the taxation of other forms of life insurance benefits, including annuities, survival benefits paid at the expiration of the insurance policy, dividend distributions, interest accrued on dividends, etc., based upon the law-based taxation principle prevailing in China, we understand that other forms of insurance benefits are also exempt from individual income tax.
2 Immigration and Taxation
- Is dual nationality recognized in China
China does not recognize dual nationality. According to Article 9 of the Nationality Law of the People’s Republic of China, a PRC citizen who acquires a foreign nationality will automatically lose his or her PRC nationality. In recent years, the PRC government has taken action against the phenomenon of many PRC citizens simultaneously holding both PRC and non-PRC passports at the same time through various means, including fingerprint collection.
- Has China joined the Common Reporting Standard (CRS)
Yes, China has joined the OECD's CRS system and is committed to implementing common reporting standards for the exchange of tax-related information for financial accounts. The first information exchange will take place in September 2018.
- How to determine PRC tax resident
An individual who loses PRC citizenship status by emigrating and acquiring a foreign nationality can continue to be classified as a PRC tax resident according to his or her place of residence. According to Article 1 of the Individual Income Tax Law, individuals who have a domicile in China or individuals who do not have a domicile in China but have resided in China for one year or more constitute a PRC tax resident and shall pay individual income tax on income derived within and outside China.
Besides, according to Article 1 of the Individual Income Tax Law, even if an individual does not constitute a tax resident, he or she still shall pay individual income tax on income derived within China if he or she constitute a non-resident taxpayer.
- Does China levy income taxes on worldwide income
According to Article 1 of the Individual Income Tax Law, PRC tax authorities levy income taxes on the basis of worldwide income. Thus, individuals who are domiciled in China or who have resided in China for one year or longer may be required to pay individual income taxes on income gained within or outside China.
3 Cross-border Inheritances
- Validity of wills made outside China
Generally, a will that is made outside of China but that is certified by a notary or is confirmed by a PRC court will be deemed effective in China. However, a cautious attitude should be held towards wills created offshore, because, due to the restrictions of the Succession Law, many mechanisms especially those created under common law legal systems are not recognized in China, such as establishing residency rights through wills, settling trusts through wills, and restricting successors from dividing the estate via a will.
- Can foreigners inherit PRC situs assets
In principle, there are no restrictions on the succession of PRC situs assets by foreigners. However, if the estate to be inherited by foreigners involves equities of enterprises from industries that restrict the entry of foreign capital, the inheritor may be prohibited from participating in the operation of the enterprise, even if he or she inherits equity in such an enterprise.
- Can foreigners remit funds inherited in China to abroad
In principle, there are no restrictions on such remittances, provided that it is approved by the State Administration of Foreign Exchange.
