On 24 July 2026, the Ministry of Finance and the State Taxation Administration issued theAnnouncement on Matters Concerning Individual Income Tax on Offshore Trusts, which establishes clear individual income tax (IIT) rules for offshore trusts in China. In conjunction with the effective operation of the Common Reporting Standard (CRS) information exchange mechanism, the scope for Chinese tax residents to use offshore trusts and other cross-border structures to avoid individual income tax will be substantially reduced.

To assist relevant market participants in accurately understanding the key points of the new rules and making appropriate tax compliance arrangements, at the invitation ofChina Foreign Exchange, Mr. Liu Tianyong, founder of Huashui Law Firm, authored an article titled"The New Individual Income Tax Rules on Offshore Trusts and Their Implications,"which was published inChina Foreign Exchange. The article provides a detailed analysis of the new IIT rules on offshore trusts, covering the scope of offshore trusts, tax elements, anti-avoidance rules, innovations in estate tax and expatriation tax, and the application of retroactivity and statute of limitation periods. It also sets out the corresponding tax liabilities and compliance pathways for both existing and newly established offshore trusts. This article represents a timely and professional response by Huashui lawyers to the latest cross-border tax legislative developments and serves as an important reference for relevant parties to accurately understand the taxation rules for offshore trusts and to prevent tax-related risks.

The full text is as follows:

 

The New Individual Income Tax Rules on Offshore Trusts and Their Implications

Announcement No. 21 marks the official establishment of individual income tax rules for offshore trusts in China. For settlors of existing offshore trusts, it is recommended that, within the 90-day grace period after the effective date of Announcement No. 21, they fulfill their tax payment obligations in accordance with the law for income derived from the establishment of the trust and income arising during the trust's duration over the past three or five years.

By Liu Tianyong | Edited by Bai Lin

 

In recent years, with the effective implementation of the automatic exchange of financial account information under the Common Reporting Standard (CRS), the overseas income of Chinese tax residents has become increasingly transparent. For ordinary types of income such as dividends, interest, and gains from property transfers, the IIT liability can generally be accurately determined and tax levied under theIndividual Income Tax Law of the People's Republic of China(hereinafter "IIT Law"). However, for certain special types of income—such as gains derived through offshore trusts, offshore contractual private equity funds, or offshore asset securitisation structures—due to the lack of clear rules in substantive tax laws, there is considerable controversy as to whether such income is taxable, how to determine the applicable tax category, and how to calculate the taxable income. Even where tax authorities have access to relevant information, effective tax collection remains difficult.

On 24 July 2026, the Ministry of Finance and the State Taxation Administration issued theAnnouncement on Matters Concerning Individual Income Tax on Offshore Trusts(Announcement No. 21 [2026], hereinafter "Announcement No. 21"), marking the official establishment of IIT rules for offshore trusts in China. Announcement No. 21 clarifies the taxpayers, taxation stages, tax categories, and tax bases for offshore trusts, establishes anti-avoidance rules, and innovatively introduces expatriation tax and estate tax in the offshore trust context. By constructing these tax rules, it enables more effective taxation of such special types of income and complies with the principle of taxation by law. In combination with the effective operation of the CRS, the space for tax residents to use offshore trusts and similar structures to avoid tax will be greatly reduced, which will help combat cross-border tax avoidance and achieve tax fairness.

 

Scope of Offshore Trusts

The trust originates from common law systems and refers to a legal arrangement whereby the owner of trust property (the settlor) transfers property rights to a trustee, who administers or disposes of the property for the benefit of the beneficiaries or for a specified purpose. A trust is a special legal construct, most typically characterised by the existence of dual ownership: the trustee holds legal title to the trust property, while the beneficiary holds equitable title. Constrained by civil law principles such as the "one property, one right" doctrine, certain fundamental concepts in China's trust system differ considerably from those overseas. For example, theTrust Law of the People's Republic of China(hereinafter "Trust Law") characterises the relationship between the settlor and the trustee as a "fiduciary relationship" rather than a transfer of property.

Under Announcement No. 21, an offshore trust means "a trust established under the laws of a jurisdiction outside the PRC, or any other legal arrangement that has trust-like functions." Accordingly, offshore trusts under Announcement No. 21 have two characteristics: first, they are established under foreign law. In this regard, Announcement No. 21 should be interpreted based on foreign trust law systems, which explains why it treats the placement of property into an offshore trust not as a fiduciary relationship but as a transfer of trust property rights. Second, it is not limited to arrangements formally named "trust"; any legal arrangement with trust-like functions falls within the scope of Announcement No. 21. The core functions of a trust are twofold: first, preservation and appreciation of property, achieved through the trustee's professional management; second, risk isolation—although the trustee and beneficiary have certain property rights, the trust property is independent from their own property and may only be managed and disposed of for the benefit of the beneficiaries or for specified purposes, thereby achieving risk isolation and bankruptcy remoteness. In addition, civil trusts have a wealth succession function, generally as discretionary trusts, whereby the settlor transfers property ownership to the beneficiaries (successors) to achieve intergenerational wealth transfer, while the property rights can be divided into multiple beneficial interests for distribution and management among heirs. Commercial trusts have a financing function, as trust property is essentially an aggregate of assets that can raise funds by pooling property from numerous settlors. The trust legal structure gives rise to many more complex legal arrangements, including structured deposits, insurance, contractual funds, asset securitisation structures, etc., all of which have trust-like functions.

Announcement No. 21 also provides for an exception: "financial products issued by banks, insurance companies, securities firms, fund management companies, and other entities that are subject to the supervision of the financial regulatory authorities of their jurisdiction and that conduct business independently and assume risks with respect to unspecific clients" are not regarded as offshore trusts. This provision effectively excludes certain public-offering financial products derived from commercial trusts, such as structured deposits, insurance products, and contractual public-offering funds. Thus, Announcement No. 21 primarily targets civil trusts, commercial trusts, and private structures derived from commercial trusts established under foreign law. For public-offering financial products subject to financial regulation in their jurisdiction, the IIT liability should be determined under the general provisions of the IIT Law, and the special taxation rules for offshore trusts do not apply.

 

Why Special Tax Rules for Offshore Trusts and Similar Structures?

China enacted its Trust Law as early as 2001, theSecurities Investment Fund Law of the People's Republic of Chinain 2012, and theRegulations on the Supervision and Administration of Private Investment Fundsin 2023. However, clear and comprehensive tax rules for trusts and their derivative legal arrangements have never been formulated. The main reason is that under Chinese law, the establishment of a trust is not regarded as involving a transfer of property rights; a trust is essentially a fiduciary relationship of "entrusting others to manage property on one's behalf," where the trustee merely acts as a collecting and paying agent, and the income is primarily enjoyed by the beneficiaries. Naturally, the beneficiaries should be taxed in accordance with the law, and their tax obligations are relatively clear, affording little scope for tax avoidance. Moreover, China's trust industry has always been dominated by commercial trusts, with civil trusts being very uncommon, and commercial trusts are subject to strict financial regulation. Public-offering financial products derived from commercial trusts generally adopt contractual structures but are also subject to strict regulation, while private funds generally adopt limited partnership structures and are subject to partnership tax rules, not trust tax rules. In practice, when trust beneficiaries and public fund unit holders receive income, the trustee or fund manager, as the paying party, determines the applicable tax category based on the nature of the income and fulfils the withholding obligation under the IIT Law. Private fund investors, as partners, are required to self-declare IIT under the business income tax category when the private fund earns income, and there is generally no scope for tax avoidance.

For offshore trusts and their derivative legal structures, however, the situation differs. First, under foreign trust law systems, the establishment of a trust involves a transfer of property from the settlor to the trustee, after which the property rights are held by the trustee and beneficiaries. Without special provisions, such property transfers would result in a leakage of tax. Second, during the trust's duration, because many offshore trusts are established in jurisdictions with low transparency, regulatory and tax authorities cannot ascertain beneficiary information, making it difficult to levy tax on beneficiaries, thus creating risks for asset transfer, wealth concealment, and tax avoidance. Third, with respect to trust operating income, there is also controversy over the applicable tax category. Different types of trust property generate income of different natures—for example, if the trust property is real estate held for lease, the income is primarily rental income; if the trust property is equity held for the long term, the income is primarily dividends. How to determine the tax category when trust income is distributed to beneficiaries is debated in trust tax theory. One view, based on the "trust conduit theory," treats the trust as a tax-transparent entity and applies the "flow-through treatment" principle, with the tax category determined by the nature of the income itself. Another view, based on the "trust entity theory," advocates for a separate "trust income" tax category to cover all types of income distributed through the trust. Therefore, special rules are needed to clarify the applicable tax category for offshore trust income. Fourth, at the trust termination stage, there is again a transfer of property from the trustee or beneficiary back to the settlor, similar to the establishment stage, requiring special provisions on the tax liability for such a transfer.

 

Tax Elements of Offshore Trusts and Similar Structures

Taxation Stages

Announcement No. 21 provides that the taxation stages of a trust mainly consist of three parts: first, at the trust establishment stage, when a natural person settlor places property into an offshore trust, the transfer of trust property rights triggers IIT liability. Second, during the trust duration stage, income generated from the operation of trust property triggers IIT liability. Third, at the trust termination stage, when trust property rights are returned to the settlor, the liquidation proceeds of the trust property trigger IIT liability.

Taxpayer

For offshore trusts and similar structures established by resident individuals as settlors, Announcement No. 21 establishes the fundamental principle of "settlor taxation." Whether at the establishment, duration, or termination stage, the settlor is the taxpayer. The establishment stage is treated as a transfer of trust property by the resident individual, and the termination stage is treated as the resident individual's acquisition of the trust property—in both cases, the settlor bears the tax liability. Only at the duration stage, because trust property rights have been transferred to the trustee and beneficiaries, and trust operating income is generally enjoyed by the beneficiaries, taxing the settlor would not align with the ability-to-pay principle. However, Announcement No. 21 designates the settlor as the taxpayer for trust operating income, possibly because offshore trusts have low transparency and beneficiary information cannot be effectively ascertained.

For offshore trusts and similar structures established by non-resident individuals, because China exercises only source-based tax jurisdiction over non-residents, the non-resident individual has a tax liability only where income is derived from sources within China at the establishment stage. For example, if a non-resident individual establishes an offshore trust using property located in China, this is deemed a transfer of domestic property rights, generating income sourced in China and giving rise to a tax liability. In addition, where a non-resident individual establishes an offshore trust and a resident individual is a beneficiary, the resident individual bears the tax liability for trust operating income. Where an offshore trust established by a non-resident individual terminates and distributes trust property to a resident individual, the resident individual bears the tax liability.

Tax Category and Tax Base

At the trust establishment stage, because it is treated as a transfer of property, the taxable income is the balance of the market value of the trust property less the original cost and reasonable expenses, taxed under the "income from transfer of property" category. Under the principle of no double taxation, after tax is paid, the original cost of the trust property is adjusted to its market value. At the trust duration stage, for gains from the transfer of trust property, Announcement No. 21 applies the "flow-through treatment" principle and taxes them under the "income from transfer of property" category. For other types of income, Announcement No. 21 does not apply the "flow-through treatment" principle but does not create a new tax category either; instead, it summarises all trust operating income under the "interest, dividends, and bonus income" category. At the trust termination stage, the taxable income is the liquidation proceeds of all trust property, taxed under the "interest, dividends, and bonus income" category. The liquidation proceeds of the trust property are determined as the balance of the market value of the trust property at the time of termination less the original cost and reasonable expenses.

 

Anti-Avoidance Rules for Offshore Trusts and Similar Structures

Anti-Nominee and Anti-Strawman Arrangements

For nominee transactions and strawman arrangements, Announcement No. 21 applies a look-through approach based on the substance-over-form principle. At the trust establishment stage, where an individual transfers property through another person or entity but the property is actually funded, borne, or controlled by that individual, it is deemed that the individual acquired and transferred the property to the offshore trust; where a non-resident individual places property into an offshore trust that is actually controlled by a resident individual, it is deemed that the resident individual placed the property into the offshore trust. At the trust duration stage, where an individual transfers property to an offshore trust or to an overseas entity held, controlled, or managed by the offshore trustee, it is deemed a transfer to the offshore trust; where an offshore trust established by a non-resident individual distributes income to the non-resident individual but is actually received, used, controlled, or disposed of by another resident individual, it is deemed that the offshore trust distributed income to that resident individual.

Deemed Distribution of Income

For income generated during the trust duration, regardless of whether it is actually distributed, it is deemed distributed and subject to IIT on an annual basis. The deemed distribution rule embodies the "trust conduit theory," treating the trust as a tax-transparent entity, similar to China's current tax rules for sole proprietorships and partnerships. Of course, once tax is paid annually, actual distributions are not subject to further tax.

Transfer Pricing

Where offshore trusts and similar structures transfer trust property by means of distributions, gifts, transfers, or transfers at undervalue, the taxable income shall be determined as the balance of the market value of the property less the original cost and reasonable expenses. In addition, losses arising from transfers of property to related parties of the offshore trust shall not be deducted from taxable income. This rule constitutes a transfer pricing rule in the offshore trust context, aimed at combating the reduction of tax liability through related-party transactions with non-arm's-length pricing that increase losses or reduce income. It should be particularly noted that the offshore trust transfer pricing rule does not examine whether the related-party transaction is based on a reasonable commercial purpose; any transaction with non-arm's-length pricing is subject to tax adjustment.

 

Estate Tax and Expatriation Tax for Offshore Trusts and Similar Structures

Estate Tax

Estate tax generally refers to a tax levied on the estate of a decedent when the heir exercises the right of inheritance. In theory, there are two views on the nature of estate tax: the income tax view and the property tax view. The income tax view holds that the inheritance of an estate constitutes income to the heir, and tax should be levied on the heir under the IIT Law, with the tax base being the fair value of the inherited estate less the original cost and reasonable expenses. The property tax view holds that estate tax is a tax on the estate itself, levied on the decedent as the taxpayer under property tax rules, with the tax base being the fair value of the estate. China's current property and behaviour taxes and IIT rules do not include estate tax provisions.

Announcement No. 21 innovatively introduces estate tax in the offshore trust context and adopts the income tax view. For a resident individual's offshore trust during its duration, where the resident individual dies and the offshore trust is succeeded by a non-resident individual or has no successor, the taxable income is the balance of the market value of the trust property on the date of death less the original cost, and the trustee or its designated domestic agent shall file and pay IIT on behalf of the decedent under the "interest, dividends, and bonus income" category. However, the estate tax for offshore trusts applies only where the offshore trust is succeeded by a non-resident or has no successor; if it is succeeded by a resident individual, it is not treated as a realisation of income, and no tax is imposed at the succession stage.

Expatriation Tax

Expatriation tax generally refers to a tax levied on an individual who ceases to be a tax resident of a jurisdiction, based on the fair value of all domestic property less the original cost and reasonable expenses, treated as a realisation of capital gains. The essence of expatriation tax is the abandonment of tax residency, treated as a deemed realisation of all capital gains. China's IIT Law contains provisions on tax clearance upon expatriation, requiring taxpayers who deregister their Chinese household registration (hukou) due to emigration to settle tax liabilities before deregistration. However, such tax clearance upon expatriation differs from expatriation tax in two respects. First, the former targets the act of abandoning household registration, while expatriation tax targets the act of abandoning tax residency. Second, tax clearance upon expatriation addresses overdue taxes (i.e., taxes and late payment penalties that were payable but not paid in the past), whereas expatriation tax addresses unrealised capital gains—a new tax liability arising from the abandonment of tax residency.

Announcement No. 21 provides that during the duration of a resident individual's offshore trust, where the resident individual becomes a non-resident individual, the taxable income is the balance of the market value of the offshore trust property on the date of conversion less the original cost, and the resident individual shall declare and pay IIT under the "interest, dividends, and bonus income" category. This is the first application of expatriation tax in China's tax law and signals a gradual alignment of China's tax system with international standards.

 

Implications for Taxation of Other Types of Overseas Income

Certain provisions in Announcement No. 21 are not limited to the offshore trust context and have implications for the taxation of other types of overseas income. First, it clarifies that losses from the transfer of trust property during the duration may be offset against gains from property transfers within the same tax year, but may not be carried forward to subsequent years. The IIT Law provides for taxation on a per-transaction basis for income from property transfers, with no annual settlement mechanism, and there is no legal basis for offsetting gains and losses from property transfers; however, disallowing such offset would be inconsistent with tax fairness. Therefore, the rule established in Announcement No. 21—permitting intra-year offset without cross-year carry-forward—has reference and promotional value. Second, "income from transfer of property" and "interest, dividends, and bonus income" during the trust duration may not be offset against each other. Third, with respect to the determination of tax residency status, Announcement No. 21 re-emphasises the important role of the "centre of vital economic interests." Under current tax law, individuals who habitually reside in China due to household registration, family, or economic interests are Chinese tax residents. In the past, the tax authorities mainly focused on household registration; taxpayers who deregistered their hukou were often directly treated as non-residents without further examination. Announcement No. 21 clarifies that individuals who acquire foreign nationality or long-term or permanent residency abroad but whose centre of vital economic interests remains in China are still resident individuals. This rule clearly applies not only to offshore trusts but also indicates that future criteria for determining tax residency will be more stringent.

 

Retroactivity and Statute of Limitation under Announcement No. 21

Whether Announcement No. 21 "imposes" IIT on offshore trusts and similar structures, or merely clarifies and refines the existing IIT Law, determines the issue of retroactivity and the applicable statute of limitation periods. From the wording of Announcement No. 21, the clarity of the tax liability at the establishment, duration, and termination stages differs.

With respect to the tax liability at the establishment stage, because under the Trust Law it cannot be concluded that a transfer of trust property rights occurs upon trust establishment, and given the differences between Chinese and foreign trust systems, this tax liability is unclear, and both the tax law and the taxpayer should bear responsibility for the non-payment. Accordingly, the statute of limitation for non-payment at the establishment stage follows the rules for taxpayer errors (e.g., computational mistakes), and is set at three years, extendable to five years in special circumstances. In addition, applying the rules for underpayment caused by the tax authorities, late payment penalties shall not be imposed for tax payments made within the grace period.

With respect to the tax liability at the duration stage, which is clearer than the establishment stage, Announcement No. 21 does not prescribe a statute of limitation for unpaid taxes from the duration stage, but only provides that late payment penalties shall not be imposed for payments made within the grace period. Nevertheless, the author believes that unpaid taxes from the trust duration stage constitute underpayment due to the taxpayer's failure to file a tax return, and by reference to theState Taxation Administration Reply on the Statute of Limitation for Unfiled Tax Returns(Guo Shui Han [2009] No. 326), which states that "non-payment or underpayment of tax due to the taxpayer's failure to file a return under Article 64, Paragraph 2 of the Tax Collection and Administration Law does not constitute tax evasion, resistance to tax collection, or fraud; the statute of limitation generally follows the spirit of Article 52 of the Tax Collection and Administration Law, and is generally three years, extendable to five years in special circumstances," a three- or five-year limitation period should likewise apply.

With respect to the tax liability at the termination stage, which is essentially a trust property liquidation tax, unless the tax law expressly provides otherwise, it is clearly impossible to conclude that such a tax liability exists. Therefore, the taxation rules for the termination stage have no retroactive effect and no statute of limitation issue applies; they can only apply to trust terminations occurring after the effective date of Announcement No. 21.

 

Tax Risks and Compliance Recommendations for High-Net-Worth Individuals

For high-net-worth individuals who have already established existing offshore trusts and similar structures, their tax liabilities are now clarified under Announcement No. 21. It is recommended that, within the 90-day grace period after the effective date of Announcement No. 21, they fulfill their tax payment obligations in accordance with the law for income derived from trust establishment and income arising during the trust duration over the past three or five years. If they fail to fulfill their tax payment obligations within the 90-day grace period, the tax authorities may impose late payment penalties when recovering the taxes. If the tax authorities issue aTax Matters Noticerequiring the settlor to file a tax return for the unpaid taxes, and the settlor, after receiving the notice, refuses to file, this will be treated as tax evasion under Article 63 of theTax Collection and Administration Law of the People's Republic of China, exposing the settlor to penalties ranging from 0.5 to 5 times the underpaid tax. If, after receiving theTax Collection Decisionand theTax Penalty Decision, the settlor still refuses to comply, the tax authorities may refer the case to the public security authorities for criminal investigation on charges of tax evasion.

For high-net-worth individuals establishing new offshore trusts and similar structures, it is essential to fully understand and fulfill their tax obligations in accordance with the law: for the establishment stage, tax must be paid under the "income from transfer of property" category within the period from 1 March to 30 June of the year following the trust establishment; for income generated during the trust duration, tax must be paid within the period from 1 March to 30 June of the following year under the "income from transfer of property" or "interest, dividends, and bonus income" categories; for income received at the trust termination stage, tax must be paid within the period from 1 March to 30 June of the following year under the "interest, dividends, and bonus income" category. When filing tax returns, taxpayers must submit the required tax returns and attach the offshore trust's financial statements, operating income, and income distribution records.

 

The author is the founder of Huashui Law Firm, as well as a senior tax lawyer.

Source:China Foreign Exchange, Issue 16, 2026.