The Advent of the Look-Through Taxation Era

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. 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. 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.

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 — encompassing all forms of express trusts established under the laws of offshore financial centers such as the Cayman Islands, BVI, Singapore, Hong Kong, Jersey and Guernsey.
• Second tier: Other legal arrangements possessing trust-like functions — a "substance over form" catch-all covering overseas foundations, family funds, certain nominee arrangements and beneficial interest arrangements.
• Third tier: Express exclusions — standardized financial products issued by licensed financial institutions that are subject to regulatory oversight and carry on business independently are not treated as offshore trusts.

(B) The Open-Ended Nature of the Determination Standard

The catch-all provision 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 nominees; and overseas limited partnership structures with fixed beneficial entitlement distribution mechanisms.

III. Full-Lifecycle Taxation Rules: 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 as the locus of tax liability.

(A) Establishment Stage: Taxation Upon Transfer

Article 2 provides that where a resident individual transfers property into an offshore trust, the transfer is deemed to be a disposal of property. Taxable income is the balance of fair market value at the time of transfer less original cost and reasonable expenses, levied under "income from property transfer" at 20%.

Basis Step-Up Principle. 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, ensuring the same appreciation is not taxed twice.

Nominee Look-Through. Where property is transferred through a third-party nominee but is in fact funded or controlled by a resident individual, the transfer is recharacterized on a look-through basis as having been made by that resident individual.

(B) Continuation Stage: Annual Look-Through Taxation Regardless of Distribution

Article 4 is the most revolutionary provision. Income generated during the continuance of an offshore trust — and of overseas entities held, controlled or managed by the trust — shall, regardless of whether actually distributed, be attributed to the resident individual as the taxpayer, who shall file and pay IIT annually.

• Separate calculation of two categories: "income from property transfer" and "income from interest, dividends and bonuses." Losses in one category may not offset income in the other, and losses may not be carried forward.
• Operating expenses non-deductible: Trustee remuneration, management fees, advisory fees and audit fees are not deductible, effectively taxing gross rather than net income.
• Quasi-CFC rules: Articles 13 and 14 extend CFC rules to the individual income tax domain — look-through treatment triggers when passive income exceeds 50% of profits, there is no substantive business, funds are used for personal consumption, or decisions are not made autonomously. Direct or indirect holding of 25% or more constitutes "control."
• Deemed distribution mechanism: Article 12 treats mortgage/pledge for the individual's debts, trustee-paid personal expenses, gratuitous use of trust property, and indirect benefit channels as deemed distributions subject to tax.

(C) Termination and Special Trigger Events: Mandatory Liquidation Mechanism

Announcement No. 21 establishes distinct liquidation taxation for special trigger events — trust termination, change of resident status, and the death of the settlor — which in effect resemble "exit taxes." Where lump-sum payment is genuinely impracticable, Article 8 of Announcement No. 15 allows equal installments over five years. Note that this installment arrangement applies only to liquidation tax in termination/status-conversion/death scenarios; transfer-in tax and annual filings are not eligible.

IV. Anti-Avoidance Rule Architecture: Five Lines of Defense

• First — Nominee Look-Through at Establishment (Article 2): The individual who actually funds and controls the property is deemed the transferor, regardless of nominal title.
• Second — Overseas Entity Look-Through at Continuation (Articles 13, 14): The "quasi-CFC rule" attributing undistributed profits of trust subsidiary SPVs to the settlor.
• Third — Deemed Distribution at the Distribution Stage (Article 12): All substantive benefit receipt in non-nominal forms is brought within taxation.
• Fourth — Expanded Resident Determination (Article 11): An individual with foreign nationality or residency abroad whose principal economic interests are sourced from within China may be determined a domiciled resident, continuing to bear comprehensive tax liability on worldwide income.
• Fifth — Procedural Anti-Avoidance (Articles 15, 16): Where no reasonable commercial purpose or arm's-length basis is shown, the tax authorities may implement tax adjustment, with the burden of proof resting on the taxpayer.

V. Collection Procedures: Restructuring the Filing Obligation System

Announcement No. 15 builds a systematic procedural framework. The competent tax authority is determined by a three-tier order of priority: the authority for the corporate income tax of the principal domestic production and operating enterprise related to the trust property; failing that, the authority of the place where domestic property is located; failing that, the authority of the place of habitual residence within China. Initial filing requires a complete set of documentation — the trust instrument, detailed list of trust property with fair-market-value support, organizational structure chart, and overseas entity registration documents. Annual filings require the annual IIT self-assessment return, detailed statements and annual reports, plus financial statements, income statements and capital flow records. All foreign-language documents must be accompanied by Chinese translations.

The trustee (and trust administrator) must separately account for the two categories of income for each tax year, assist the settlor in completing the filing, and be responsible for the truthfulness, accuracy and completeness of the information provided. Intermediaries (law firms, tax agent firms, family offices) that assist in circumventing filing obligations also face accountability.

VI. Transitional Arrangements: The 90-Day "Golden Remediation Window"

Article 17 establishes transitional arrangements of substantial practical significance. Within 90 days of implementation (i.e., by October 22, 2026), where a resident individual proactively files and pays the following taxes, late payment surcharges shall be waived in full and no administrative penalty shall be imposed:

• IIT payable but unpaid on property transfers into offshore trusts during January 1, 2023 to December 31, 2025;
• IIT payable on the transfer of China-sourced property into offshore trusts by non-resident individuals during that period; and
• Continuation income of offshore trusts prior to January 1, 2026, calculated on a lump-sum basis.

Exceeding the deadline triggers recovery of the principal plus a late payment surcharge of 0.05% per day (annualized ~18.25%), fines of 0.5 to 5 times the underpaid amount for tax evasion, and potential criminal referral. Notably, the window period forgives only surcharges and penalties — not the principal tax itself.

VII. Legal Controversies and Unresolved Issues

Several noteworthy controversies remain, including: (A) interface with Article 63 of the Tax Collection and Administration Law on whether general promulgation constitutes a "notification to file" for tax-evasion purposes; (B) enforcement feasibility regarding overseas trustee obligations; (C) the absence of quantitative standards for "principal economic interests sourced from within China"; (D) double taxation risk under red-chip structures and foreign tax credit coordination; (E) the legality boundaries of the "quasi-expatriation tax" and "quasi-estate tax" mechanisms; and (F) overlap between already-taxed income and trust property fair market value at liquidation.

VIII. The Tax Position of Domestic Trusts: Differentiated Regulation

While offshore trusts face comprehensive look-through taxation, the tax treatment of domestic family trusts remains in a state of relative vacuum. As of 2026, China does not yet have comprehensive tax collection rules tailored to domestic family trusts. The differentiated approach — "deferring comprehensive taxation" for domestic trusts while imposing "stringent regulatory look-through" for offshore trusts — reflects deeper policy calculus on the economic, information and functional dimensions. Industry expectation is that the core principles of Announcement No. 21 will in the future extend into domestic trusts, though likely through classified (rather than uniform) look-through and complementary non-transactional transfer mechanisms.

IX. Conclusion and Outlook

The promulgation of Announcements No. 21 and No. 15 marks the transition of China's offshore trust tax governance from "regulatory vacuum" to "comprehensive look-through." The core logic can be distilled into three themes: the comprehensive implementation of substance-based taxation; full-lifecycle closed-loop management; and the combination of rigid collection with flexible transition.

For high-net-worth individuals and their 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 compliance payment of unpaid taxes for 2023–2025. In the longer term, the portfolio-based allocation of wealth management vehicles (domestic family trusts, insurance trusts, charitable trusts) will displace the dominance of the single offshore trust. The "tax-free era" of offshore trusts has come to an end; compliance, transparency and substance are the only way forward.

Principal reference instruments: Announcements No. 21 and No. 15 of 2026; Individual Income Tax Law of the PRC (2018 Revision); Law of the PRC on the Administration of Tax Collection; Trust Law of the PRC.