On 24 July 2026, the Ministry of Finance (MOF) and the State Taxation Administration (STA) jointly issued the Announcement on Matters Concerning Individual Income Tax on Offshore Trusts (Announcement No. 21 of 2026, hereinafter referred to as “Bulletin 21”). On the same day, the STA issued a supplementary administrative announcement (Announcement No. 15 of 2026, “Bulletin 15”). This marks China’s first comprehensive regulatory framework governing the individual income tax (IIT) lifecycle of offshore trusts, covering trust establishment, duration, termination, status alteration and inheritance, with retrospective effect to 1 January 2023.

This article systematically examines the new rules across four key dimensions: regulatory interpretation, estimated tax treatment, potential areas of controversy, and practical responses for enterprises and high-net-worth individuals (HNWIs). It addresses both immediate compliance obligations and forward-looking planning strategies for taxpayers operating with offshore trust structures.

Tax on Trust Funding and the End of Deferral

The most immediate and consequential change introduced by Bulletin 21 is that funding an offshore trust now triggers an immediate IIT liability, eliminating the previous deferral advantage.

Regulatory Interpretation

Article 3 of Bulletin 21 stipulates that when a resident individual transfers assets into an offshore trust, the market value of the assets at the time of funding, minus their original cost basis and reasonable expenses, shall be recognised as taxable income. Such income is taxed at 20% under the category of “income from the transfer of property.”

The regulatory rationale is that shifting legal ownership of assets from an individual to a trust constitutes a deemed property transfer for tax purposes, thereby crystallising capital gains at the point of funding. The rules further provide for a tax-basis step-up mechanism: after tax is paid on the funding event, the asset’s cost basis resets to its market value at the time of funding. This follows the symmetry principle in tax law and ensures that gains are taxed only once.

Estimated Tax Treatment

In an illustrative case, on 1 January 2026, a resident individual transfers offshore financial assets into a British Virgin Islands (BVI) holding entity wholly owned by an offshore trust. The market value of the assets at the funding date is CNY 100 million, against an original cost base and reasonable expenses totalling CNY 30 million. The individual declares income from the transfer of property of CNY 70 million, resulting in an IIT liability of CNY 14 million (20% of CNY 70 million). The asset’s new cost basis within the trust becomes CNY 100 million.

Bulletin 21 uses the term “funding” (装入) rather than the traditional legal term “transfer.” In practice, funding offshore family trusts often involves a special purpose vehicle (SPV) issuing new shares to a trust-owned SPV under a red-chip restructuring structure. While this is legally characterised as a capital increase rather than a direct share transfer, tax authorities are likely to apply a substance-over-form approach to assess whether the economic effect of funding the trust has been achieved.

Potential Controversies

Several interpretive uncertainties remain unresolved under the new rules:

• Scope of deductible reasonable expenses: The categories and documentation requirements for deductible expenses are not specified, leading taxpayers to confirm eligible items with the competent tax authority before filing.
• Valuation of illiquid assets: Determining the fair market value of non-publicly traded equity or real estate at the funding date poses significant practical difficulties. Article 16 authorises tax authorities to commission third-party appraisals where valuations are absent or unreasonable, making valuation a likely focal point for future disputes.
• Original cost basis of upper-tier offshore holding-company equity: Where underlying assets were previously restructured and taxed, the carry-over basis of upper-tier equity transferred into the trust remains unclear and tends to be negotiated on a case-by-case basis with tax authorities.

Practical Responses

In response to these funding-phase tax obligations, families and their advisers are adopting several proactive measures:

• Comprehensive asset inventory: For existing or planned trusts, preparing a full inventory of funding dates, market values at funding, historical cost records and allowable expense documentation supports accurate projection of potential tax liabilities.
• Cash-flow timing considerations: Tax on the funding phase can fall due before the trust assets produce liquidity. Bulletin 15 offers a five-year instalment plan for households facing genuine liquidity constraints, provided they register with the tax authority before the filing deadline.
• Sequential planning approach: Given the upfront 20% tax cost, future trust planning should follow a sequential methodology, with tax projections modelled before the structure is designed, taking into account valuation timing, asset composition and cash-flow arrangements.

Look-Through Rules and Anti-Avoidance Provisions

The second major change tightens the regulatory framework against arrangements that separate economic benefits from legal ownership through complex intermediary structures.

Regulatory Interpretation

Bulletin 21 introduces a comprehensive five-tier look-through anti-avoidance mechanism rooted in the substance-over-form principle:

• Nominee look-through (Article 2) : Assets transferred through intermediaries but ultimately funded, borne or controlled by an individual are deemed funded directly by that individual for tax purposes.
• Mixed trust treatment (Article 9) : Where both resident and non-resident individuals fund the same offshore trust, the entire arrangement is treated as funded by the resident, applying resident tax rules comprehensively across all beneficiaries.
• Deemed distribution rules (Article 12) : Four specific scenarios are treated as constructive distributions, namely: (i) pledging trust assets for a resident’s debt; (ii) covering a resident’s expenses or allowing rent-free use of assets; (iii) passing economic benefits through a third party; and (iv) providing benefits to a resident’s related parties or controlled entities. This targets the strategy of enjoying trust assets without formal distributions.
• Quasi-CFC rules (Article 13) : Offshore entities are pierced for IIT purposes where passive income exceeds 50% of total profits, there is no substantive business operations, funds are used for personal consumption, or there is no independent operational decision-making. This applies the logic of controlled foreign company (CFC) rules to trust structures.
• De facto control test (Article 14) : Direct or indirect holding of 25% or more of equity, or substantive control over funding, operations, purchasing, sales or distributions, constitutes de facto control triggering look-through treatment.

Estimated Tax Treatment

In an illustrative case, a non-resident individual establishes an offshore trust with financial assets. In 2027, the trust distributes CNY 3 million in cash to the individual’s daughter, who is a Chinese tax resident, and reimburses her CNY 800,000 for overseas tuition expenses. Under Bulletin 21, the daughter declares the CNY 3 million cash distribution as dividend, interest and bonus income, resulting in an IIT liability of CNY 600,000 (20%). The CNY 800,000 tuition reimbursement, being a deemed distribution, triggers an additional IIT liability of CNY 160,000 (20%).

Bulletin 15 further imposes direct compliance obligations on offshore trustees, requiring them to accurately account for operational yields and distributions, categorise them annually by income type, and assist taxpayers with filing and documentation.

Potential Controversies

Several boundary issues require further regulatory clarification:

• Substantive operations threshold: Entities with a reasonable commercial purpose and substantive operations sit outside the look-through rules, but the evidentiary threshold and documentation standards are undefined, placing the burden of proof squarely on taxpayers.
• Scope of related parties: The definition of related parties and controlled or benefited entities under Article 12’s deemed distribution rules remains unclear, potentially creating broad application risks.
• Cross-border tax interaction: Multi-layered trust structures may trigger tax liabilities in multiple foreign jurisdictions, and the interaction with foreign tax rules requires comprehensive modelling rather than a single-country compliance perspective.

Practical Responses

Responses in this area focus on surfacing, documenting and controlling fund flows:

• Nominee arrangement review: Indirect funding through a nominee produces the same tax outcome as direct funding, so formalising or unwinding these arrangements removes potential exposure.
• Family office compliance review: Family offices are reviewing loan arrangements, related-party payments, asset use arrangements and non-cash benefits to identify where the deemed-distribution rules may apply.
• Continuous reporting infrastructure: Rather than treating compliance as a one-off historical filing exercise, many families are establishing continuous reporting mechanisms for future years with the support of professional tax advisers.

Re-Determining Tax Residency and Exit Tax

The third major change substantially limits the use of changes in nationality or residency to exit China’s tax net.

Regulatory Interpretation

Article 11 of Bulletin 21 provides that individuals who have acquired foreign nationality, or long-term or permanent residency abroad, but whose primary economic interests are derived from within China, may be determined to be domiciled resident individuals for IIT purposes.

This short provision carries outsized significance. By prioritising the centre of economic interests over the habitual-residence test found in earlier IIT implementation regulations, acquiring a foreign passport no longer guarantees an exit from China’s tax jurisdiction. The provision effectively nullifies the tax-planning strategy of expatriation for the purpose of avoiding IIT on offshore trust assets.

Article 6 further introduces a formal Chinese exit tax. Where a resident individual becomes a non-resident during the trust’s duration, the market value of the trust assets on the day of conversion, minus the original cost basis, is taxed as dividend, interest and bonus income. This removes emigration as a viable route to escape China’s tax net.

Estimated Tax Treatment

In an illustrative case, an individual acquired foreign citizenship years ago but never physically relocated, and their family, main business operations and core asset management remain in mainland China. Having funded an offshore trust with foreign assets on 30 June 2023, the individual is likely to be classified as a domiciled resident under the centre-of-economic-interests test. Consequently, they would be required to retroactively declare and pay tax on the 2023 funding event within the 90-day transitional grace period.

Potential Controversies

Several interpretive questions remain open regarding the reach of the new residency test:

• Criteria for centre of economic interests: The specific factors and weighting for determining where an individual’s primary economic interests lie are undefined, creating significant uncertainty for cross-border families.
• Application to dual tax residents: Where an individual is a dual tax resident under two domestic tax laws, the final outcome relies on the tie-breaker rules in any applicable bilateral double taxation agreement (DTA).
• Spillover effects: It remains unclear whether this expanded definition of domicile extends to other IIT scenarios or to other categories of taxes beyond the scope of Bulletin 21.
• Cross-border double taxation risk: A Chinese resident settlor paying tax on trust income, while a foreign resident beneficiary is later taxed on distributions at home, may face double taxation without clear access to foreign tax credits.

Practical Responses

Responses tend to start with a fundamental review of the individual’s residency position:

• Residency status review: Families with foreign passports or permanent residency but deep economic ties to China are reviewing their residency position, and where the economic-interests test points to Chinese residency, offshore trust planning is being restructured under resident rules.
• Beneficiary tax profiling: The tax profile of beneficiaries can now matter more than the trust structure itself. A structure with an offshore senior settlor and an onshore junior beneficiary has become tax-inefficient, shifting the focus to succession logic and beneficiary provisions.
• DTA analysis: Analysing applicable double taxation agreements and tie-breaker rules helps establish final residency positions and understand cross-border tax effects before making structural decisions.

Transitional Treatment for Existing Trusts (90-Day Window)

The fourth major change is the transitional regime established for trusts that existed prior to the effective date of the new rules.

Regulatory Interpretation

Article 17 sets out a phased transitional treatment with different compliance requirements:

Phase	Applicable Period	Treatment
Funding phase (residents)	1 January 2023 – 31 December 2025	Unpaid IIT reported within 90 days of effective date; no late fees
Funding phase (non-residents)	1 January 2023 – 24 July 2026	Unpaid IIT reported within 90 days of effective date; no late fees
Historical retained earnings	Generated before 1 January 2026	Treated uniformly as dividend, interest and bonus income; reported within same window; no late fees
Normalisation phase	From 1 January 2026 onward	Standard provisions of the new rules apply in full
Enforcement	Post-window filings	Late fees apply; potential tax-evasion charges with recovery of unpaid tax, penalties and interest

The competent tax authority may extend the look-back period where unpaid amounts are exceptionally large, subject to discretionary determination.

Estimated Tax Treatment

In an illustrative case, a business owner transferred CNY 5 billion of holding equity, with a cost basis of CNY 500 million, into a Cayman Islands trust in 2019, and CNY 1 billion of undistributed dividends accumulated after 2023. The funding-phase tax is calculated as (CNY 5 billion − CNY 500 million) × 20% = CNY 900 million. The duration-phase tax on retained dividends is CNY 1 billion × 20% = CNY 200 million. The total liability amounts to CNY 1.1 billion.

Bulletin 15 allows a five-year instalment plan for taxpayers facing severe liquidity constraints, for example in the case of trust liquidation or the death of the settlor, subject to timely registration with the tax authority. Initial filings must include an Annual Report on Individual Income Tax of Offshore Trusts covering both the trust’s setup year and the 2025 reporting period, together with historical financial statements.

Potential Controversies

Several procedural points remain uncertain:

• Look-back period for retained earnings: Unlike the funding phase, the look-back period for retained earnings is not expressly capped, pointing to application of the general provisions of the Law on the Administration of Tax Collection.
• Threshold for exceptionally large amounts: The criteria for determining what constitutes an “exceptionally large amount” triggering extended look-back is a discretionary area for tax authorities, creating uncertainty for large-value trusts.
• Cross-border payment logistics: Tax is paid onshore in renminbi while offshore trust assets are generally held abroad in foreign currencies, so aligning payment with cross-border repatriation and foreign-exchange controls presents a practical compliance challenge.

Practical Responses

For existing trusts, the responses follow a broadly common sequence:

• Trust census: Compiling a comprehensive census of all offshore trusts and holding companies, documenting setup dates, jurisdictions, trustees, asset-level funding dates, market values, cost bases and historical yields, establishes the factual basis for filing.
• Liability segmentation: Back-tax liabilities are segmented into funding-phase liabilities and duration-phase liabilities. The uniform classification of historical yields as dividend, interest and bonus income simplifies the second category.
• Window compliance: Filing and payment before 22 October 2026 (90 days from 24 July 2026) avoids late fees, with a five-year instalment application available where the liability is large.
• Unwinding modelling: Terminating a trust and repatriating assets triggers liquidation tax rather than a tax-free exit, so net-of-tax modelling is recommended before any decision to unwind an existing structure.

Domestic Alternatives and Strategic Repositioning

The final change is one of strategic emphasis rather than prohibition: the new rules reset the rationale for holding an offshore trust without banning the structure outright.

Regulatory Interpretation

Bulletin 21 does not outlaw offshore trusts. As MOF and STA officials have publicly stated, the aim is to improve tax certainty and transparency. The core wealth-management functions of offshore trusts remain protected, including: ring-fencing family wealth from business and debt risk; succession certainty that avoids probate and heir disputes; centralised cross-border asset management; and effective family governance mechanisms.

Estimated Tax Treatment

Domestic trust structures sit differently under the new rules. Domestic family trusts and insurance trusts are largely unaffected by Bulletin 21, offering relative policy stability and compliance certainty. According to UBS estimates reported by Caixin, China’s family trust market rose from approximately CNY 650 billion in 2024 to close to CNY 1 trillion in 2025.

Some advisers have promoted domestic civil trust alternatives, claiming near-zero setup cost by utilising tax exemptions for transfers between close relatives, for example by appointing a son as trustee. However, industry analysis points to three key weaknesses:

• Prevailing tax circulars exempt direct transfers to relatives, not transfers to relatives acting as trustees.
• Under the substance-over-form doctrine, if the patriarch retains control and the family retains the economic benefits, the economic reality mirrors an offshore trust.
• Such arrangements are exposed to general anti-avoidance rules (GAAR) adjustments for lacking a reasonable commercial purpose.

Potential Controversies

Several caveats apply before treating domestic structures as a safe harbour:

• Regulatory uncertainty: China has no specific IIT rules for domestic civil trusts, and treating them as a lasting regulatory blind spot runs contrary to the current direction of policy tightening.
• Scope expansion risk: The rules apply not only to formal trusts but to any offshore arrangement with trust-like features, including certain funds, family offices and foundations.
• Foreign tax credit management: Managing foreign tax credits where the settlor is taxed in China but the beneficiary is taxed abroad remains an evolving area of practice with limited official guidance.

Practical Responses

The practical takeaway is about matching structure to underlying purpose:

• Structural utility focus: Offshore trusts remain valuable where the primary motivation is structural utility, that is asset protection, succession planning and governance, rather than tax arbitrage.
• Domestic diversification: Shifting new planning toward domestic family and insurance trusts works as a diversification strategy, with a domestic core alongside a compliant offshore satellite, while recognising their limitations on asset types, jurisdictional flexibility and privacy.
• Forward-looking design: Given the likelihood that domestic trust rules will tighten over time, families are advised to design structures with both current compliance and future regulatory evolution in mind.

 

Bulletin 21 and Bulletin 15 mark a significant shift in China’s approach to cross-border wealth management, moving from an era of rule arbitrage toward one of rule adherence and tax transparency. For families that maintain offshore trusts for genuine succession, asset protection or governance purposes, the new framework brings greater certainty and legitimacy, as clarifying the tax-evasion question allows the professional value of trusts to demonstrate its commercial and family utility.

For existing trusts, the immediate priority is addressing historical tax positions ahead of the 90-day transitional window, which closes on 22 October 2026. The longer-term focus is structural redesign and planning under the new rules, taking into account residency status, asset composition, beneficiary arrangements and cross-border tax treaty implications.

Because offshore trust taxation depends heavily on individual facts and circumstances, working through the specific position with a qualified tax adviser before filing or restructuring is essential to ensure that historical compliance is properly addressed and future planning is strategically aligned

To answer more questions or to enquire about what audit is needed for your business, please send your enquiry to enquiries@lehmanbrown.com.