The previous post was the background. Just had a discussion in the group with a few old friends from the VC circle, and I finally figured out the ins and outs of this matter—truly mind-blowing... Many Chinese companies listed overseas choose to have their founders/executives/early employees transfer their equity into offshore trusts during IPOs, rather than holding it under their personal names. The main benefit of doing this? Tax avoidance. Why does this work for tax avoidance? Well, for years, China’s tax authorities didn’t have any precedent for taxing trusts. Everyone was doing it, sharing tips with each other; law firms and intermediaries, of course, encouraged this approach—they could make money from it. But on July 24 this year, the Ministry of Finance and the State Taxation Administration issued new regulations: Chinese tax residents who derive income from offshore trusts must pay 20% personal income tax. The calculation method defined in Article 3 of the tax notice is: Personal income tax payable = (market value at the time of transferring assets into the trust − original property value − reasonable expenses) × 20% Here’s the key part—how does this work? Let’s break it down with an example: Say your company went public in 2021, with a market cap of $2 billion × your 5% equity = $100 million in value. Five years later, the industry has declined, the company’s performance is dismal, and the stock price has plummeted. The company’s market cap is now only $200 million. Even though you, as an executive, haven’t sold your shares, your 5% equity is now worth just $10 million. Now, you’re required to pay 20% personal income tax—essentially a "transfer tax" for putting assets into an offshore trust—based on the 2021 valuation of $100 million as the tax base (ignoring original property value and reasonable expenses). This means the tax authorities expect you to pay $20 million in taxes. But now your shares are only worth $10 million. Even if you sell all your shares on the market (imagine the pressure on the stock price), and use the proceeds to pay taxes, you’d still owe the tax authorities $10 million. As for your shares losing value? Well, that’s your own investment failure... And today, October 22, is a critical deadline: anyone who set up offshore trusts in the past and has unpaid taxes must voluntarily declare and settle their taxes by this date; otherwise, late payment penalties will apply. If it’s deemed tax evasion, you could face fines. Cases like the one above—where a company’s stock price drops by 90% or more after IPO—are common among Chinese companies listed overseas. There are plenty of similar situations, and anyone who frequently trades Chinese or Hong Kong stocks could probably name a long list of companies. So in the coming weeks to months, we might see more announcements of share reductions from founders, family trusts, and major shareholders of Hong Kong-listed companies.