China Establishes New Individual Income Tax Rules for Offshore Trusts

China’s new rules generally treat a resident individual’s transfer of property into an offshore trust as a deemed disposition, imposing 20% individual income tax on any resulting gain rather than on the gross value of the transferred property.

The era of relying on structural opacity for offshore tax planning has officially ended in China. On July 24, 2026, China’s Ministry of Finance (MOF) and State Taxation Administration (STA) jointly issued Announcement No. 21 of 2026 (Announcement Regarding Individual Income Tax Matters for Offshore Trusts), alongside the STA’s procedural companion, Announcement No. 15 of 2026.

These rules establish a comprehensive taxation framework for offshore trusts funded by Chinese tax residents or nonresidents. As noted by international financial media, this move marks one of Beijing’s most significant efforts to tighten oversight of offshore wealth arrangements.[1] While the primary tax liability falls on the relevant individual taxpayer, the regulations purport to impose significant new accounting, cooperation, and—in specific scenarios—filing obligations directly on offshore trustees.

This LawFlash analyzes the new regulatory framework and outlines immediate action items for offshore private banks, trust companies, and wealth managers in light of the 90-day compliance window.

WHAT CHANGED AND WHY IT MATTERS

Prior to these announcements, the taxation of offshore trusts in China lacked trust-specific attribution and timing rules. Chinese residents’ global income has always been subject to individual income tax, but the specific application of the law to trust structures was undefined.

The new rules adopt a tax attribution approach to trusts and specified offshore entities; they do not purport to invalidate the trust or negate its civil-law effects under the governing trust law. The framework effectively treats the trust and its nonqualifying underlying offshore entities as pass-through vehicles for tax calculation purposes.

WHO IS IN SCOPE: RESIDENT- AND NONRESIDENT-CONTRIBUTOR TRUSTS

The scope of the regulations is broad. It applies not only to trusts formally settled by Chinese tax residents, but also to:

• Resident individuals contributing property to an offshore trust
• Nonresident individuals contributing China-source property
• Property nominally contributed by a nonresident individual where the contributed property is in fact controlled by a resident of the People’s Republic of China (PRC)
• Trusts funded by nonresidents that make actual or deemed distributions to resident individuals
• Trusts succeeded by resident individuals

 Crucially, the rules focus on the “resident individual who contributed or is deemed to have contributed property to the trust” (the resident contributor), rather than strictly on the nominal settlor named in the trust deed. Individuals who actually fund, bear the cost of, or control the property transferred through intermediaries are deemed to be the contributors.

Where two or more resident individuals contribute property to the same offshore trust, the trust property and income are allocated among them based on the relative market value of their respective contributions. Where both resident and nonresident individuals contribute to the same trust, all contributed property is treated as resident-funded.[2]

TAXATION BY LIFECYCLE

The regulations establish distinct tax treatments depending on whether the property was contributed by a resident or a nonresident individual.

Establishment Phase Calculation: For resident contributors, contributing property is treated as a taxable property transfer. The tax is 20% on the difference between the market value at contribution and the original cost (minus reasonable expenses), not on the gross value of the assets.[3] The tax basis of the property is then stepped up to the market value at contribution.

Continuation Phase: For resident-funded trusts, income is attributed annually and must be strictly categorized as either “property transfer income” or “interest, dividends, and bonus income.”[4] Property-transfer losses may not be carried forward, cross-category offsets are prohibited, and trust management fees, legal fees, and investment advisory fees are not deductible.

Deemed Distributions for Nonresident-Funded Trusts: For trusts funded by nonresident individuals, specified benefits provided to related PRC-resident individuals—including year-end outstanding loans or guarantees, payment of personal expenses, and free or below-market use of trust property—may be treated as deemed distributions.[5]

QUALIFYING OFFSHORE ENTITIES, CONTROL, AND SCOPE EXCLUSIONS

A critical nuance in the regulations is the treatment of underlying offshore entities. The rules do not automatically pierce through all entities held by a trust.

The Control Standard

Under Article 14, an individual is deemed to “control” an offshore entity if they meet either a quantitative or qualitative test

• directly or indirectly holding 25% or more of the equity, voting rights, shares, rights to income or profits, or similar interests (with a look-through rule treating intermediate layers of more than 50% as 100%); or
• exercising substantive control over capital, operations, purchases and sales, or distributions, even if the 25% threshold is not met.[6]

Exclusion for Qualifying Operating and Regulated Offshore Entities

Announcement No. 21 defines “offshore entity” using four risk indicators (e.g., passive income exceeding 50%, a lack of substantive operations, and payment of personal expenses).[7] However, it explicitly excludes regulated financial institutions (banks, insurance companies, securities firms) that face unspecified customers and bear risk, as well as other organizations that can prove they have a reasonable commercial purpose and engage in substantive business operations.[8]

Exclusion for Specified Institution-Issued Financial Products

Separately, financial products issued by regulated financial institutions that face unspecified customers, independently conduct business, and bear risk are excluded from the “other legal arrangements with trust-like functions” limb of the offshore-trust definition.[9] Note that this exclusion applies to the financial product as a legal arrangement. An outer trust properly settled under foreign trust law would not exit the scope of Announcement No. 21 simply because it holds qualifying insurance or financial products.

DIRECT OBLIGATIONS OF TRUSTEES AND INTERMEDIARY LIABILITY

While the tax liability falls on individuals, STA Announcement No. 15 imposes direct obligations on appointed trustees as a matter of PRC tax administration. Announcement No. 15 does not impose a general withholding obligation on offshore trustees. Instead, it mandates specific compliance and support roles:

• Annual PRC Tax-Category Calculations and Reporting Support: Article 11 requires trustees to account for trust income and distributions by PRC tax category and to assist taxpayers with filings.[10]
• Direct Filing Obligation (Death Scenario): Article 7 imposes a narrow filing and payment-on-behalf obligation following the death of a resident contributor in specified succession cases.[11]
• Truthfulness, Accuracy, and Completeness: Both taxpayers and trustees are responsible for the truthfulness, accuracy, and completeness of information submitted and must provide Chinese translations simultaneously when submitting foreign-language documents.[12]
• While private banks and wealth managers may not bear the direct reporting duties of a trustee, Article 14 of Announcement No. 15 explicitly warns that intermediaries or agents who violate laws and regulations, resulting in the underpayment of taxes by taxpayers or trustees, may be subject to administrative measures and penalties under the PRC Tax Collection Administration Law.[13] The announcements do not specify a distinct mechanism for enforcing these obligations against trustees with no PRC presence or assets.

THE 90-DAY STATUTORY FILING WINDOW

Article 17 of Announcement No. 21 establishes a 90-day statutory filing and payment period for specified historical liabilities. Timely payment avoids late-payment surcharges, but the provision is not framed as a general amnesty or blanket waiver of tax penalties.[14]

The covered periods differ:

• Resident contributors: Unpaid taxes on property contributed between January 1, 2023, and December 31, 2025.
• Nonresident contributors: Unpaid China taxes on property contributed between January 1, 2023, and July 24, 2026.
• Pre-2026 income of resident-funded trusts: This income is covered regardless of whether it was distributed and is reported, without distinction among income categories, as interest, dividends, and bonus income.
• Nonresident-funded trusts: The text also requires resident recipients of distributions from nonresident-funded trusts to file within the 90-day period, without expressly specifying a lookback start date. This constitutes a notable open question for practitioners.

IMMEDIATE OPERATIONAL STEPS AND OPEN QUESTIONS

To effectively serve clients and manage institutional risk, offshore wealth management institutions should consider the following immediate steps:

Data Preparation for the 90-Day Window

Prepare the specific materials required for initial filing: trust documents, asset inventories, organizational charts, financial statements, and operational income and distribution records. For existing trusts, the establishment-year report, 2025 annual report, and historical financial statements will be required.

Foreign Tax Credit Assessment

Article 10 of Announcement No. 21 permits a credit for foreign taxes of an individual-income-tax nature paid in respect of the offshore trust. The applicable ceiling is calculated on a country-by-country basis using category-specific components under MOF/STA Announcement No. 3 of 2020 (Articles 3, 4, 6, and 10); creditability will also depend on the legal character of the foreign tax and the supporting payment documentation.[15] Institutions should identify foreign taxes paid that may be eligible for credit against PRC tax.

Tax Basis and Deemed Dispositions

Analyze structures for potential tax basis step-ups following contribution or status changes. Note that Article 6 only triggers a deemed disposition when a resident contributor becomes a nonresident during the trust’s continuation; it is not a universal exit tax for all residency terminations. Following the status change, subsequent trust events are governed by Article 8. PRC-resident recipients of actual or deemed distributions are generally the relevant taxpayers, while any other China-source tax consequences must be evaluated under generally applicable PRC tax rules.[16]

Substance and Domicile Review

Review underlying entities to determine if they meet the “substantive business operations” exception to avoid pass-through taxation. Enhance know-your-customer (KYC) procedures for the PRC domicile and tax-residence status of each contributor or deemed contributor. Acquiring foreign nationality or permanent residency does not by itself terminate PRC tax residence if the individual’s principal economic interests derive from China.[17]

Structure Review

Review whether any trust-like financial product itself satisfies the Article 1 exclusion. A formally settled offshore trust does not fall outside Announcement No. 21 merely because it holds a qualifying insurance product or other financial product.