China – New Offshore Trust Tax Rules

The People’s Republic of China has introduced the first comprehensive tax framework regulating offshore trusts, marking a significant shift in the taxation of cross-border wealth arrangements. On 24 July 2026, the PRC Ministry of Finance (“MOF”) and State Taxation Administration (“STA”) jointly issued an Announcement on Individual Income Tax Matters for Offshore Trusts (MOF and STA Announcement [2026] No. 21), together with the procedural companion STA Announcement [2026] No. 15 (“New Rules”).

Who are Affected

Broadly speaking, the New Rules apply to regulate offshore wealth arrangements and affect all offshore trusts established by PRC tax residents or non-residents individuals. Those affected include :-

1. resident individuals contributing property to offshore trusts;
2. non-resident individuals contributing China-source property;
3. cases where property contributed nominally by a non-resident individual is actually controlled by a Chinese resident; and
4. trusts making distributions to resident individuals or being succeeded by resident individuals.

For multiple residents contributing to the same trust, tax liability will be based on the market value of each contribution.

Tax at Various Stages

The tax treatment of offshore trusts is now clearly defined at the following stages : (i) establishment; (ii) continuation; and (iii) termination. The New Rules focus on substantive control rather than the legal form. Chinese tax authorities will examine corporate structures to identify the individuals who actually fund, control or benefit from the assets of the trust on a look-through basis. Even if a contribution is made through an intermediary, the actual contributor may still be treated as the taxpayer.

1. Establishment : A resident contributor will be taxed on the unrealized gain of the contributed property at its market value at contribution less the original costs at the tax rate of 20%.

2. Continuation : For resident-funded trusts, the income will be attributed to the contributor annually regardless of whether there is any distribution. Such income includes trust income and income from offshore entities held or managed by the trust on behalf of the resident contributor. Losses cannot be carried forward, and cross-category offsets are prohibited. For non-resident trusts, tax arises when a distribution is made to a resident with certain benefits being treated as deemed distributions.

3. Termination : The resident contributor will be taxed on liquidation gains. Residents receiving trust property upon the trust’s termination are taxed on the market value of the property received.

Underlying Offshore Entities

Article 14 of the New Rules implements a control test for entities. An individual is deemed to control an entity if he holds 25% or more of the equity, voting rights or income rights, applying look-through rule that treats intermediate layers of more than 50% as wholly held. Regulated financial institutions are excluded from these rules under specific conditions, while other entities may qualify for exclusion if they demonstrate reasonable commercial purpose and substantive business operations.

Furthermore, financial products issued by regulated institutions are also excluded from the offshore-trust definition, but an offshore trust does not fall outside the rules simply because it holds qualifying products.

Trustee’s Obligations

Although the tax liability lies with the individuals setting up the trust or the beneficiaries, trustees have direct compliance responsibilities, including accounting for trust income and distributions in accordance with PRC tax categories annually and assisting with filings. Notably, on the death of a resident settlor, the trustee is required to file and pay tax on behalf of the deceased’s estate. Both taxpayers and trustees are responsible for the accuracy of information submitted and any foreign documents must be translated into Chinese.

The 90-Day Filing Window

There is a short window period of 90 days for taxpayers to comply with the New Rules. They have 90 days from the effective date (ie by 22 October 2026) to address any historical tax liabilities. Timely compliance helps avoid late-payment surcharges, and delay or non-compliance will result in penalties and in serious cases, tax evasion investigations. The historical liabilities to be reported are :-

1. For resident contributors : Unpaid tax on property contributed from 1 January 2023 to 31 December 2025;

2. For non-resident contributors : Unpaid tax on property contributed from 1 January 2023 to 24 July 2026; and

3. For pre-2026 income of resident-funded trusts : All such income must be reported and taxed uniformly as interest, dividends and bonus income.

Resident recipients of distributions from non-resident-funded trusts must also file within 90 days, although the start date for the lookback period remains unclear.

Practical Actions for Compliance

Offshore trustees, private wealth managers and beneficiaries should review the New Rules and consider the following actions :-

1. prepare trust documents and asset inventories;
2. review financial statements and income records;
3. assess potential foreign tax credits that may offset PRC tax liabilities;
4. evaluate asset basis and potential deemed dispositions;
5. verify whether underlying entities qualify for the substantive business exclusion; and
6. note that foreign nationality or permanent residency does not automatically terminate PRC tax residence if the individual’s primary economic interests remain in China.