On July 24, 2026, the Ministry of Finance and the State Taxation Administration jointly issued the Announcement on Matters Concerning Individual Income Tax on Offshore Trusts (Ministry of Finance and State Taxation Administration Announcement No. 21 of 2026, hereinafter “Announcement No. 21”). On the same day, the State Taxation Administration issued the complementary Announcement on Matters Concerning the Administration of Collection of Individual Income Tax on Offshore Trusts (State Taxation Administration Announcement No. 15 of 2026, hereinafter “Announcement No. 15”). Both instruments took effect on the date of promulgation. This marks the first time that China has systematically established, through administrative normative instruments, the substantive rules and collection procedures for individual income tax (“IIT”) on offshore trusts, filling a long-standing regulatory gap in this area and heralding the advent of a new era of “full-lifecycle, substance-over-form, regular-filing” IIT regulation of offshore trusts.
This article provides a systematic legal analysis of the institutional background, taxation logic, core rules, anti-avoidance framework, legal controversies, and practical responses arising from the new rules.
I. Institutional Background: From Regulatory Vacuum to Comprehensive Supervision
(A) Completion of Regulatory Infrastructure
The promulgation of Announcements No. 21 and No. 15 is not an isolated event, but rather the inevitable product of China’s steadily advancing capacity for cross-border tax governance. In recent years, the establishment of the following institutional infrastructure has provided the technical and data support necessary for the implementation of the offshore trust IIT rules:
First, the full operationalization of the CRS (Common Reporting Standard) for automatic exchange of financial account information. As of 2026, approximately 140 countries and jurisdictions participate in CRS information exchange. China’s tax authorities may periodically obtain account information held by Chinese tax residents at overseas financial institutions, covering trustees, settlors, beneficiaries, protectors, and other parties at all levels of a trust structure.
Second, the launch of the Golden Tax System Phase IV (Jinshui Siqi). Golden Tax Phase IV bridges the data silos among taxation, foreign exchange administration, market regulation, real property registration, and other authorities, enabling automated cross-referencing and risk identification of cross-border tax-related information, thereby significantly enhancing the tax authorities’ capacity to discover offshore trusts and conduct audits.
Third, the accumulation of enforcement experience. According to publicly available information, since 2025, tax authorities in Shanghai, Shenzhen, Jiangsu, and other regions have initiated interview-based verification with holders of existing offshore trusts, and certain shareholders of overseas-listed companies have been subject to self-review tax payments or audit assessments in connection with their offshore trust structures. The trajectory from “information exchange” to “data matching” to “case-by-case audit” and ultimately to “clear rules” represents the final institutional culmination of this regulatory closed loop, embodied in Announcements No. 21 and No. 15.
(B) The Practical Urgency of Addressing Offshore Trust Tax Avoidance
For an extended period, owing to the absence of specialized tax rules, offshore trusts have been widely deployed in the wealth planning of Chinese high-net-worth individuals for tax planning purposes. A typical arrangement involves: transferring pre-IPO corporate equity into an offshore trust prior to a public listing, utilizing the trust’s legal form to achieve asset segregation while simultaneously exploiting the tax law lacuna that “undistributed trust income is not deemed income of the settlor” to achieve long-term deferral or even substantive exemption from taxation on substantial equity appreciation.
The persistence of this state of affairs has not only resulted in significant erosion of the tax base but has also created a tax arbitrage gap between domestic trusts and offshore trusts, distorting the competitive landscape of the wealth management industry. Industry estimates suggest that the outstanding stock of offshore trusts established by Chinese residents has reached several hundred billion US dollars, involving substantial untaxed appreciation and undistributed income — an accumulation of tax compliance risk that can no longer be ignored.
Against this backdrop, the promulgation of Announcements No. 21 and No. 15 constitutes both a response to a practical problem and an important step in China’s participation in global tax governance and implementation of the BEPS (Base Erosion and Profit Shifting) Action Plan.
II. Scope of Taxation: Substance-Over-Form Identification of “Offshore Trusts”
(A) The Three-Tier Definitional Structure
Article 1 of Announcement No. 21 adopts a three-tier progressive definition of “offshore trust”:
First tier: Trusts established under the laws of a foreign jurisdiction. This is the most typical scenario, encompassing all forms of express trusts established under the laws of offshore financial centers such as the Cayman Islands, British Virgin Islands (BVI), Singapore, Hong Kong, Jersey, and Guernsey.
Second tier: Other legal arrangements possessing trust-like functions. This catch-all provision adopts a “substance over form” standard, not limited to arrangements denominated as “trusts.” Any foreign legal arrangement that substantively possesses the core functions of a trust — asset segregation, fiduciary management, and beneficial entitlement arrangements — falls within the scope of taxation. Typical examples include overseas foundations, family funds, certain types of nominee arrangements, and beneficial interest arrangements. The core purpose of this provision is to close off arbitrage opportunities created by altering the legal form to evade the “trust” label.
Third tier: Express exclusions. Standardized financial products issued by banks, insurance companies, securities companies, fund companies, and other licensed financial institutions that are subject to the financial regulatory oversight of the jurisdiction in which they are located, carry on business independently with unrelated customers, and bear risk accordingly are not treated as offshore trusts. This exclusion clause is designed to distinguish ordinary offshore financial investments from trust arrangements with tax planning purposes.
(B) The Open-Ended Nature of the Determination Standard and Associated Legal Risks
The catch-all provision of “other legal arrangements possessing trust-like functions” adopts a relatively open-ended determination standard, conferring significant discretion on the tax authorities. In practice, the following arrangements may face the risk of being recharacterized:
- Private trust companies (PTCs) established by resident individuals overseas and their subsidiary holding structures;
- Arrangements holding assets in the form of overseas foundations;
- Arrangements for holding overseas equity or real property through nominee shareholders or nominees;
- Overseas limited partnership structures with fixed beneficial entitlement distribution mechanisms.
Taxpayers must comprehensively assess the commercial substance, contractual terms, asset management methods, and beneficial interest distribution mechanisms of a specific arrangement to determine whether it falls within the taxable scope of “offshore trust.”
III. Full-Lifecycle Taxation Rules: Analysis of the Three-Tier Taxation Mechanism
The core institutional innovation of Announcement No. 21 lies in the construction of a three-tier taxation mechanism covering the entire lifecycle of a trust — establishment, continuation, and termination — uniformly applying a flat rate of 20% and consistently centering the settlor (the person transferring property into the trust) as the locus of tax liability.
(A) Establishment Stage: Taxation Upon Transfer
Article 2 of Announcement No. 21 provides that where a resident individual transfers property into an offshore trust (including overseas SPVs, partnerships, foundations, and other entities held, controlled, or managed by the trust), the transfer is deemed to be a disposal of property. The taxable income shall be the balance of the fair market value at the time of transfer less the original cost of the property and reasonable expenses, and IIT shall be levied under the category of “income from property transfer” at the rate of 20%.
Basis Step-Up Principle. To avoid double taxation, once tax has been paid, the tax basis of the property within the trust is simultaneously reset to the fair market value at the time of transfer. This “step-up in basis” mechanism ensures that the same appreciation is not taxed twice — once at the transfer-in stage and again at a subsequent disposal stage — reflecting sound legislative drafting consistent with the principle of tax neutrality.
Nominee Look-Through. Where property is transferred through a third-party nominee or nominal entity but is in fact funded, controlled, or risk-assumed by a resident individual, the transfer is recharacterized on a look-through basis as having been made by that resident individual, and the tax liability remains unchanged. This rule resonates with the anti-avoidance provisions of Article 8 of the Individual Income Tax Law.
Practical challenges. The transfer of highly appreciated assets (such as pre-IPO equity or appreciated real property) will trigger an immediate substantial tax liability, and no installment payment arrangement is available at this stage, which may impose significant liquidity pressure on taxpayers who have not generated cash flow. The transfer of cash or other non-appreciated assets generally does not give rise to a tax liability. The determination of the fair market value of unlisted company equity may involve significant valuation disputes in practice.
(B) Continuation Stage: Annual Look-Through Taxation Regardless of Distribution
Article 4 of Announcement No. 21 is the most revolutionary provision of the new rules. It stipulates that income generated during the continuance of an offshore trust established by a resident individual, and of overseas entities held, controlled, or managed by the trust, shall — regardless of whether such income is actually distributed — be attributed to that resident individual as the taxpayer, who shall file and pay IIT on an annual basis.
Separate Calculation of Two Categories of Income. Continuation income is classified into two categories: “income from property transfer” and “income from interest, dividends, and bonuses.” Losses in one category may not be offset against income in the other. Within the same category, property transfer gains and losses within the same year may be mutually offset, but losses may not be carried forward to subsequent years. Income from interest, dividends, and bonuses is taxed on a gross basis without any deduction for losses.
Operating Expenses Non-Deductible. Trustee remuneration, trust management fees, legal service fees, investment advisory fees, audit fees, and all other operating expenses are not deductible from taxable income. This rule is particularly stringent, effectively taxing “gross income” rather than “net income,” thereby increasing the effective tax burden on trust holders.
Quasi-CFC (Controlled Foreign Corporation) Rules. Articles 13 and 14 of Announcement No. 21 provide that where an overseas entity (company, partnership, foundation, etc.) under a trust satisfies any one of the following conditions, it is subject to look-through treatment and its income is directly attributed to the resident settlor:
- Annual passive income (interest, dividends, royalties, rent, capital gains, etc.) accounts for more than 50% of total profits;
- Absence of substantive manufacturing, trading, service, or other business operations;
- Funds are used for personal consumption expenditure unrelated to business operations;
- Business decisions are not substantively made by the overseas entity autonomously.
These rules essentially extend the CFC rules from the corporate income tax domain to the individual income tax domain, but on more relaxed application conditions — there is no prerequisite threshold of “low effective tax burden,” and the criteria are connected by “or,” meaning satisfaction of any one suffices for look-through. Direct or indirect holding of 25% or more of the equity interests in an overseas entity constitutes “control”; equity interests held through multiple tiers are calculated by multiplying the percentages at each tier, and an intermediate tier exceeding 50% is counted as 100%.
Deemed Distribution Mechanism. Article 12 of Announcement No. 21 provides that where an offshore trust engages in any of the following circumstances, the resident individual is deemed to have received a distribution of income, and the corresponding fair market value is included in the resident individual’s taxable income:
- Trust assets are used to provide mortgage, pledge, or guarantee for debts of the resident individual or their related parties, and such arrangement is not released or discharged before December 31 of the current year;
- The trustee reimburses or pays, on behalf of the resident individual, personal and household consumption expenditures, tax payments, etc.;
- The resident individual is permitted to use or occupy trust-held property (such as residential property, yachts, private aircraft, etc.) gratuitously or below market price;
- Economic benefits are indirectly channeled to the resident individual through third parties.
This rule is designed to close the loophole of circumventing the “no distribution, no taxation” principle through non-distribution forms of substantive benefit transfer.
(C) Termination and Special Trigger Events: Mandatory Liquidation Mechanism
Announcement No. 21 establishes distinct liquidation taxation mechanisms for special trigger events, including trust termination, change of resident status, and the death of the settlor, which in effect resemble “exit taxes”:
For the three categories of one-time liquidation scenarios described above, given the potentially substantial tax burden, Article 8 of Announcement No. 15 provides that where payment of tax in a lump sum is genuinely impracticable, the taxpayer may, upon filing with the competent tax authority, pay the tax in equal installments over a period of five years. It should be particularly noted, however, that this installment arrangement applies only to the liquidation tax in the special trigger event scenarios of termination/status conversion/death; the tax payable at the transfer-in stage and the annual continuation filings are not eligible.
IV. Anti-Avoidance Rule Architecture: Five Lines of Defense
Within the framework of China’s existing Individual Income Tax Law, Announcement No. 21 constructs a hierarchically structured and mutually reinforcing anti-avoidance rule system, embodying the in-depth application of the “substance-based taxation” principle in the trust domain.
First Line of Defense: Nominee Look-Through at Establishment Stage (Article 2). The resident individual who actually funds and controls the property is deemed to be the transferor, regardless of the nominal title holder. This rule directly pierces the tax shield of nominee arrangements.
Second Line of Defense: Overseas Entity Look-Through at Continuation Stage (Articles 13, 14). This is the “quasi-CFC rule” described above, which mandatorily attributes the undistributed profits of trust subsidiary SPVs, holding companies, and partnerships to the settlor for taxation.
Third Line of Defense: Deemed Distribution at the Distribution Stage (Article 12). Using economic substance as the criterion, all arrangements involving substantive benefit receipt in non-nominal distribution forms are brought within the scope of taxation, preventing the circumvention of distribution income through disguised means.
Fourth Line of Defense: Expanded Resident Determination on the Identity Dimension (Article 11). This article provides that an individual who has acquired foreign nationality or long-term or permanent residency abroad, but whose principal economic interests are sourced from within China, may be determined to be a domiciled resident individual, who shall continue to bear comprehensive tax liability on their worldwide income (including offshore trust income). This provision substantively narrows the traditional tax planning path of “emigrate first, then establish a trust.”
It is noteworthy that this provision uses the phrase “may be determined” (ke panding wei) rather than “shall be determined” (ying panding wei), conferring a degree of discretionary flexibility in legal effect. However, its policy orientation is unequivocal and firm — paper immigration cannot sever China’s tax jurisdiction. That said, within the framework of international tax treaties, if the individual simultaneously constitutes a tax resident of another contracting state, the ultimate determination of residency must be made in accordance with the tie-breaker rules of the applicable tax treaty, including the progressively applied factors of permanent home, center of vital interests, habitual abode, and nationality. Announcement No. 21 cannot override the provisions of a tax treaty.
Fifth Line of Defense: Procedural Anti-Avoidance (Articles 15, 16). Where the taxpayer is unable to demonstrate a reasonable commercial purpose and compliance with the arm’s length principle, the tax authorities have the power to implement a tax adjustment. Where the value of property cannot be provided or is manifestly unreasonable, the tax authorities may refer the matter to a third-party appraisal institution for determination of the tax valuation. The burden of proof rests on the taxpayer.
Stringent Treatment of Mixed Trusts. Article 9 of Announcement No. 21 provides that where a resident and a non-resident individual jointly transfer property into the same trust, the entire trust is treated as having been funded by the resident individual, and the comprehensive taxation rules applicable to resident individuals apply uniformly. This “all or nothing” approach avoids the complexity of tax base bifurcation in mixed trusts and reflects the legislative orientation of stringent governance.
V. Collection Procedures: Restructuring the Filing Obligation System
Announcement No. 15 builds a systematic procedural framework for collection covering the determination of the competent tax authority, filing deadlines, filing documentation, and trustee obligations.
(A) Determination of the Competent Tax Authority
Given that offshore trusts involve cross-border elements, with trust property, settlors, and beneficiaries potentially distributed across multiple jurisdictions, the determination of the competent tax authority is the logical starting point of the collection process. Announcement No. 15 establishes a three-tier order of priority:
- First priority:The tax authority competent for the corporate income tax of the principal domestic production and operating enterprise related to the trust property. This standard connects the tax jurisdiction over the trust to the source of its economic substance, and is reasonable.
- Second priority(where there is no domestic enterprise): The tax authority of the place where the domestic property is located.
- Third priority(where there is no domestic property): The tax authority of the place of habitual residence within China.
(B) Filing Deadline Framework
(C) Filing Documentation Obligations
For the initial filing, the resident individual is required to submit a complete set of the following documentation: – Trust instrument (full set of trust deed, letter of wishes, and other documents); – Detailed list of trust property and fair market value supporting documentation; – Trust organizational structure chart (including all tiers of subsidiary SPVs, holding companies, partnerships, etc.); – Registration documents of overseas entities.
For each annual filing, the resident individual is required to submit: – Annual Individual Income Tax Self-Assessment Return (Form B); – Detailed Statement of Individual Income Tax on Offshore Trusts; – Annual Report Form for Individual Income Tax on Offshore Trusts; – Annual financial statements, income statements, and capital flow records of the trust.
All foreign-language documents must be accompanied by Chinese translations.
(D) Statutorization of Trustee Obligations
Announcement No. 15 expressly provides that the trustee (and trust administrator) shall separately account for the two categories of income — “income from property transfer” and “income from interest, dividends, and bonuses” — for each tax year, assist the settlor in completing the filing, and be responsible for the truthfulness, accuracy, and completeness of the information provided. This means that the legal obligations of overseas trustee institutions are explicitly articulated for the first time in China’s tax law system. However, given the inherent limitations on Chinese tax authorities’ enforcement jurisdiction over overseas trustees, the practical effectiveness of this obligation remains to be observed.
Furthermore, intermediaries (law firms, tax agent firms, family offices, etc.) that assist taxpayers in circumventing filing obligations in violation of the rules will also face accountability. This provision imposes compliance pressure along the entire service chain.
VI. Transitional Arrangements: The 90-Day “Golden Remediation Window”
Article 17 of Announcement No. 21 establishes transitional arrangements of substantial practical significance for existing offshore trusts. Within 90 days of the implementation date of the Announcement (July 24, 2026) — i.e., by October 22, 2026 — where a resident individual proactively files andpays the following taxes, late payment surcharges shall be waived in full and no administrative penalty shall be imposed:
Scope of retroactivepay: – IIT payable but unpaid on income from property transfers arising from the transfer of property by a resident individual into an offshore trust (or a trust-controlled entity) during the period from January 1, 2023 to December 31, 2025; – IIT payable but unpaid on the transfer of property sourced from within China into an offshore trust by a non-resident individual during the period from January 1, 2023 to the implementation date of the Announcement; – Income generated during the continuance of an offshore trust of a resident individual prior to January 1, 2026, calculated on a lump-sum basis uniformly under “income from interest, dividends, and bonuses” without distinguishing between categories of income.
Consequences of exceeding the deadline: Wherepay is not completed within the 90-day window period, the tax authorities shall, in accordance with the law, recover the principal amount of the tax and impose a late payment surcharge at the rate of 0.05% per day (annualized rate of approximately 18.25%). Where the conduct constitutes tax evasion, a fine of 0.5 to 5 times the underpaid tax amount shall be imposed. Where the circumstances are serious, the matter shall be transferred to the judicial authorities for criminal prosecution in accordance with the law. Furthermore, where the amount of tax payable but unpaid is substantial, the recovery period is subject to the extended provisions of the Tax Collection and Administration Law (extendable to five years where the amount exceeds RMB 100,000), and there is no limitation period for the recovery of tax evaded or fraudulently obtained.
Legal Characterization of the Window Period
A key point requires clarification: the 90-day window period forgives only the late payment surcharges and administrative penalties — it does not forgive the principal amount of the tax. Accordingly, even if a taxpayer completespay within the window period, they must still pay in full all tax due for the period 2023–2025. The value of the window period lies in: (1) eliminating late payment surcharges (at an annualized rate of approximately 18.25%, this represents a substantial financial cost for large tax amounts); (2) eliminating administrative penalty risk (fines of 0.5–5 times); (3) eliminating criminal prosecution risk; (4) obtaining certainty of tax compliance.
Furthermore, the expiry of the 90-day window period does not mean that undiscovered unpaid taxes are henceforth “safe.” The tax authorities may still rely on CRS information exchange data and the recovery periods stipulated in the Tax Collection and Administration Law to continuepursue recovery, and taxpayers who fail to file proactively within the window period will face more severe legal consequences.
VII. Legal Controversies and Unresolved Issues
Notwithstanding the relative maturity of the legislative technique demonstrated in Announcements No. 21 and No. 15, there remain several noteworthy legal controversies in the areas of tax law theory, enforcement feasibility, and interface with higher-level law.
(A) Interface with Article 63 of the Tax Collection and Administration Law
Article 63 of the Tax Collection and Administration Law treats “refusal to file after having been notified by the tax authorities to file” as one of the constituent elements of tax evasion. Whether the general public promulgation of Announcement No. 21 can be equated to a “notification to file” addressed to specific taxpayers, thereby satisfying the prerequisite for triggering a determination of tax evasion under Article 63, is a matter of divergent legal interpretation.
The mainstream view is that the promulgation of a normative instrument addressed to the general public should not be interpreted as a statutory “notification” to specific taxpayers — otherwise, the mere promulgation of any tax normative instrument would itself constitute “notification,” and any failure to file pursuant to new rules could potentially fall within the scope of tax evasion, which clearly does not accord with the legislative intent of Article 63 of the Tax Collection and Administration Law.
It must be cautioned, however, that after the expiry of the 90-day window period, the tax authorities could very well use CRS data to identify specific taxpayers on a targeted basis and serve formal Tax Matter Notification Letters, at which point a refusal to file would clearly trigger a determination of tax evasion. The compliance value of the window period is thus further underscored.
(B) Enforcement Feasibility Dilemma Regarding Overseas Trustee Obligations
Announcement No. 15 requires overseas trustees to assist in filing and be responsible for the truthfulness of information provided, but Chinese tax authorities lack effective territorial enforcement mechanisms against overseas trustee institutions. If a trustee refuses to cooperate, the tax authorities would have difficulty directly imposing administrative penalties or compulsory enforcement against it. This issue is particularly acute in the scenario of the settlor’s death — if an overseas trust company refuses to file on behalf of a deceased settlor, the domestic tax authorities would, in practice, lack an effective means of recovery.
(C) Absence of Quantitative Standards for “Principal Economic Interests Sourced from Within China”
Article 11 of Announcement No. 21 uses “principal economic interests sourced from within China” as the core criterion for determining that an individual with foreign status is a Chinese tax resident, but the Announcement does not provide specific quantitative indicators (such as the threshold proportion of domestic-source income to total income, the threshold proportion of domestic assets to net assets, the degree of participation in domestic business activities, etc.). This ambiguity may give rise to disputes in case-by-case enforcement and also provides taxpayers with room to contest.
(D) Double Taxation Risk
The comprehensive look-through taxation under the new rules may give rise to the following double taxation scenarios:
First, cross-border overlapping taxation. Under a red-chip structure, an equity transfer or capital increase at the BVI holding company level that transfers shares into a trust may simultaneously trigger the Chinese IIT under Announcement No. 21 (20%) and the non-resident enterprise income tax under Announcement No. 7 (10% withholding tax), with the bases of the two tax liabilities potentially overlapping.
Second, difficulties in coordinating foreign tax credits. In a situation where China treats the settlor (grantor) as the taxpayer while an overseas jurisdiction treats the beneficiary as the taxpayer, the Chinese IIT and the overseas income tax on the trust income at the beneficiary level may not be effectively coordinated under the tax credit mechanism, resulting in the same economic benefit being taxed by two countries.
(E) The Legality Boundaries of the “Quasi-Expatriation Tax” and “Quasi-Estate Tax”
The liquidation taxation under Announcement No. 21 in the scenario of change of resident status (resident to non-resident) has an economic effect highly similar to the “expatriation tax” of countries such as the United States; the liquidation taxation in the scenario of the settlor’s death with succession by a non-resident has an economic effect similar to an “estate tax.” However, China’s current legal system has not enacted an expatriation tax or an estate tax. Whether the creation, through normative instruments and within the framework of the IIT, of a taxation mechanism having similar economic effects exceeds the scope of delegation under the Individual Income Tax Law raises a certain question of legality.
The essence of this issue is that the object of IIT is “income,” while the “deemed liquidation appreciation” of trust property in the scenarios of change of resident status and death is, in nature, unrealized gains. Whether treating such gains as “income” for taxation purposes is consistent with the ability-to-pay principle and the realization principle is theoretically debatable.
(F) Overlap Between Taxed Income and Trust Property Fair Market Value
Income that has already been taxed during the continuance of the trust may already be reflected in the fair market value of the trust property. When the trust terminates and the liquidation gain is calculated based on the fair market value at the termination date, the appreciation corresponding to the already-taxed portion may be subjected to double taxation. Announcement No. 21 only states in principle that “no tax shall be levied again when already-taxed income is actually distributed,” but the rules for adjusting the tax basis in the liquidation scenario are not sufficiently clear, giving rise to uncertainty at the enforcement level.
VIII. The Tax Position of Domestic Trusts: The Logic of and Prospects for Differentiated Regulation
While offshore trusts face comprehensive look-through taxation, the tax treatment of domestic family trusts remains in a state of relative vacuum, creating a stark institutional contrast.
(A) Current Tax Treatment of Domestic Trusts
As of 2026, China does not yet have comprehensive and specific tax collection rules tailored to domestic family trusts. Under the current tax law framework, the tax treatment of domestic family trusts at each stage primarily relies on general tax law provisions and practical conventions:
- Cash transferred into trust:No change in property title occurs; neither the settlor nor the trustee incurs a tax liability; this is a zero-tax-burden model.
- Equity transferred into trust:Generally treated as an equity transfer; the settlor is subject to tax at the 20% rate under “income from property transfer,” with taxable income calculated as fair market value less original cost and reasonable expenses.
- Real property transferred into trust:Involves VAT and surcharges, IIT (or corporate income tax), deed tax, stamp duty, etc., resulting in a relatively heavy composite tax burden.
During the continuation stage, the undistributed income of a domestic family trust is currently not treated as current income of the settlor or beneficiary, and no tax is payable. This treatment stands in marked contrast to the mandatory annual look-through taxation of offshore trusts.
(B) Policy Logic of Differentiated Regulation
The differentiated approach of the regulatory authorities — “deferring comprehensive taxation” for domestic trusts while imposing “stringent regulatory look-through” for offshore trusts — has its deeper policy calculus:
Economic dimension: Domestic trust funds remain within the domestic financial system and participate in domestic economic circulation; offshore trusts transfer resident wealth abroad and retain income overseas over the long term, raising multiple issues including tax base erosion, capital outflow, and gaps in financial regulation.
Information dimension: The trustees of domestic trusts are licensed financial institutions subject to comprehensive regulation by the National Financial Regulatory Administration, and information on underlying assets, income, and distributions is transparent and readily accessible. Information on offshore trusts is highly asymmetric, and the tax authorities have long faced the predicament of “difficult to see through, difficult to obtain evidence, difficult to collect tax.”
Functional dimension: The development of domestic family trusts is still at an early stage, and the regulatorsintends to preserve institutional growth space for them. Offshore trusts, after many years of development, have had their taxplanning and even tax avoidance functionsexcessively utilized and are in urgent need of regulation.
(C) Future Direction of Domestic Trust Taxation
There is a general industry expectation that the core principles established by Announcement No. 21 — “full-lifecycle taxation, substance over form, continuous tax basis account, statutorization of information filing obligations” — will in the future extend into the domain of domestic trusts. However, based on the differentiated logic described above, the construction of the domestic trust tax regime is more likely to exhibit the following characteristics:
- Classified look-through rather than uniform look-through:Preserving reasonable tax deferral mechanisms for trusts that serve genuine social functions such as wealth transmission, old-age security, and special needs (e.g., care for disabled children);
- Complementary non-transactional transfer mechanisms:Establishing tax deferral or tax-free allowances for the transfer of non-cash assets such as equity and real property into trusts, lowering the entry threshold and guiding residents to choose onshore vehicles;
- Information filing obligations as aprerequisite step:First establishing a comprehensive trust information filing regime, then progressively refining the substantive tax rules.
IX. Conclusion and Outlook
The promulgation of Announcements No. 21 and No. 15 marks the transition of China’s offshore trust tax governance from “regulatoryvacuum” to “comprehensive look-through.” The core logic of the new rules can be distilled into three main themes:
First, the comprehensive implementation of the substance-based taxation principle. The new rules disregard the formal legalform of the trust and treat the settlor (the person who actually funds and controls the property) as the taxpayer, using economic substance as the basis of taxation, embodying the complete application of the “substance over form” principle in the tax law domain to trusts.
Second, full-lifecycle closed-loop management. From the transfer of property into the trust (entry tax) to continuation income (annual tax) and further to termination/change of status/death (exit tax), the new rules construct a complete temporal and spatial taxation chain that leaves no time window for tax avoidance arrangements.
Third, the combination of rigid collection and flexible transition. Under the rigid framework of comprehensive look-through taxation, the waiver of late payment surcharges during the 90-day window period and the installment payment arrangements in termination scenarios provide a degree of adjustment space forexisting structures and special hardship circumstances, reflecting the policy wisdom of “tempering severity with leniency.”
For high-net-worth individuals and their tax advisors, the immediate priority is to complete, before October 22, 2026, a comprehensive review of the legal architecture, property details, and tax exposure of existing offshore trusts, and to undertake compliancepay of unpaid taxes for 2023–2025 and continuation income. In the longer term, it will be necessary tore-examine the functional positioning of offshore trusts in family wealth management — what the new rules negate is the tax arbitrage function of trusts; their core legal functions of asset segregation, intergenerational transmission, and risk protection have not been lost. The portfolio-based allocation of wealth management vehicles (domestic family trusts, insurance trusts, charitable trusts, etc.) will displace the dominance of the single offshore trust and become the new industry trend.
Viewed at a deeper level, the promulgation of Announcements No. 21 and No. 15 constitutes not merely a specific refinement of the tax system, but also an important step in China’s participation in global tax governance and implementation of the BEPS Action Plan and the CRS framework. Against the irreversible backdrop of information transparency and regulatory globalization, “the genuineness of tax resident status” and “the commercial substance of economic arrangements” will become theprimary premises of cross-border wealth architecture design. The “tax-free era” of offshore trusts has come to an end; compliance, transparency, and substance are the only way forward.
Principal Reference Instruments: – Announcement on Matters Concerning Individual Income Tax on Offshore Trusts (Ministry of Finance and State Taxation Administration Announcement No. 21 of 2026) – Announcement on Matters Concerning the Administration of Collection of Individual Income Tax on Offshore Trusts (State Taxation Administration Announcement No. 15 of 2026) – Individual Income Tax Law of the People’s Republic of China (2018 Revision) – Law of the People’s Republic of China on the Administration of Tax Collection – Trust Law of the People’s Republic of China
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