Summary of Key Points
On June 23, the National Audit Office revealed that from April 2023 to August 2025, the Bank of China (BOC) used its subsidiaries as channels and organized employees to contribute small amounts of money (ranging from 1 to 100 yuan per person) to package 11 private equity funds as public funds. By doing so, the bank avoided paying taxes amounting to 2.367 billion yuan by taking advantage of the tax exemption policies for public funds. Following the exposure of this incident, the stock prices of BOC's A-share and H-share markets fell by 2.66% and 4.74%, respectively. BOC responded that it would immediately rectify the situation. Behind this behavior was a significant tax arbitrage opportunity between public and private funds, as well as the bank's own pressure to improve its financial performance.
Detailed Analysis
1. BOC's Tax Evasion Tactics: Employees Contributing to Pretend Public Funds
The BOC's fraudulent process involved four steps:
- Step 1: Using Subsidiaries as a Shield: The bank used two of its own financial institutions as intermediaries to conduct all the transactions, thereby avoiding direct association and reducing the risk of being investigated.
- Step 2: Employees Contributing to Create a False Appearance: Thousands of employees were encouraged to contribute small amounts to purchase shares (merely for nominal purposes, without receiving any benefits or bearing risks), meeting the requirement of having at least 200 fund holders to make it appear as a product "for the public".
- Step 3: Packaging as Public Funds for Registration: The private equity products, originally intended only for BOC's internal use, were disguised as public funds for registration to obtain the corresponding tax benefits.
- Step 4: Tax Evasion through a Closed Loop: BOC invested its substantial funds in these "fake public funds" and purchased fixed-income assets such as bonds. Since public funds are exempt from corporate income tax, the bank saved 2.367 billion yuan over two years by avoiding this tax.
To illustrate: It's like wanting to enjoy student discounts but not being a student; you find 200 friends to pretend to be part of a student group to buy something, so you can get all the discounts for yourself.
2. The Huge Tax Difference Between Public and Private Funds
Why did BOC go to such lengths? The tax policies for public and private funds differ significantly:
- Public Funds: To encourage ordinary investors, the state offers tax exemptions. Income from public fund operations (such as profit from buying and selling stocks or bonds, or interest) is not subject to corporate income tax, and banks do not have to pay 25% on dividends or redemption proceeds.
- Private Funds: These funds are aimed at wealthy individuals only, and there is no tax exemption. Banks investing in private funds are required to pay 25% corporate income tax on their profits.
For example, if a bank makes a profit of 1 million yuan from an investment, it would not have to pay tax if it were through a public fund; however, if it were through a private fund, it would have to pay 250,000 yuan in taxes. This difference is the root of the arbitrage opportunity.
3. Why BOC Used a Roundabout Method When It Already Has Public Funds?
BOC owns public fund platforms such as BOC Fund and BOC Wealth Management. Why didn't it use these directly? There are regulations restricting the shareholding of a single institution in public funds:
- For ordinary open-ended public funds, a single institution is generally not allowed to hold more than 50% of the shares (in some cases, even 30%). If the limit is exceeded, the fund must operate in a closed format (e.g., with restrictions on redemption) and cannot be sold to individuals.
- BOC has trillions of yuan in assets (17 trillion yuan in financial investments as of Q1). If it directly invested in its own public funds, it would either exceed the shareholding limit or face liquidity constraints, preventing flexible arbitrage.
Therefore, BOC had to use the method of packaging private funds as public funds, where there are no such restrictions on shareholding.
4. Why a Large State-Owned Bank Would Take Such Risks?
As a state-owned bank, BOC faced significant performance pressures:
- Narrowing Net Interest Margin: Banks traditionally earn profits from the interest difference between deposits and loans, but this margin has been narrowing in recent years, reducing earnings from traditional businesses.
- Self-Managed Investments as Profit Drivers: Fixed-income investments (such as bonds) are a stable source of income, but taxes on these investments reduce net profits. The 2.367 billion yuan saved represents nearly 1% of BOC's 2025 net profit (243 billion yuan). In a context of slow growth, even a small amount like this is crucial.
- Weak Domestic Business: While BOC has a strong overseas business (with 24% of revenue coming from international operations), its domestic business lags behind banks like ICBC and CCB, with fewer branches, higher deposit costs, and a weaker customer base, leading to slower domestic profit growth.
The bank also underestimated the severity of the National Audit Office's inspections, assuming that exploiting policy loopholes was not considered illegal in the past.
5. Consequences of the Incident
- Market Reaction: The stock price drop indicates that investors doubt BOC's compliance with regulations.
- Trend in Regulation: Now, all four major banks require their presidents to also serve as chief compliance officers, indicating stricter regulatory oversight. The space for such tax arbitrage will become increasingly limited.
- Possible Penalties: Although specific penalties have not been announced yet, evading 2.3 billion yuan in taxes is a serious offense, which could result in additional tax payments, fines, and potential accountability for relevant personnel.
Conclusion
BOC's actions were essentially an attempt to exploit policy loopholes through formalism, driven by performance pressures and a sense of complacency towards regulatory requirements. As regulation becomes stricter, such tactics will become more difficult to execute. This incident serves as a reminder to other financial institutions that compliance is the long-term best approach. It also highlights a simple principle for the general public: complex financial operations often hide simple profit motives. Where there are tax differences, there is potential for arbitrage, but illegal activities ultimately come at a cost.