Chinese Mainland Clarifies Individual Income Tax Rules for Offshore Trusts: Scope of Application, Taxation Stages and Filing Arrangements
The Ministry of Finance and the State Taxation Administration have issued new regulations on individual income tax relating to offshore trusts, clarifying tax treatments for individuals transferring assets into offshore trusts, as well as during trust duration, income distribution, liquidation upon termination, taxpayer status change and asset succession.
On 24 July 2026, the Ministry of Finance (MOF) and the State Taxation Administration (STA) issued Announcement No. 21 of 2026 concerning individual income tax (IIT) matters relating to offshore trusts. The announcement clarifies IIT treatment for individuals transferring assets into offshore trusts and deriving income through such trusts.The announcement came into force on 24 July 2026.
I. Scope of Regulation
An offshore trust under the announcement refers to a trust established under foreign law, or any other foreign legal arrangement that is not structured as a trust but performs substantially equivalent functions. Financial products meeting specified criteria under the announcement are excluded.
An individual shall be deemed to have transferred assets into an offshore trust if:the assets are transferred to the offshore trust or its trustee for holding, management, investment or disposal;the assets are transferred to an overseas entity held, controlled or managed by the offshore trust or its trustee.
Where an individual transfers assets via another person or organisation, but the assets are actually funded, borne and controlled by that individual, such assets shall also be treated as assets contributed by the individual to the trust.Separate criteria and exemptions apply to "overseas entities", meaning not all overseas companies and organisations are automatically subject to the rules.
II. Three Key Taxation Stages
1. Asset Contribution Stage
When a tax resident individual contributes equity, shares, real estate or other assets into an offshore trust, IIT shall be filed under "income from transfer of property" at a rate of 20%, calculated as the fair market value of the assets minus their original cost and reasonable expenses.Non-tax resident individuals who contribute China-sourced assets into offshore trusts may also be subject to IIT obligations.
2. Ongoing Operation of the Trust
All income generated during the existence of an offshore trust established by a tax resident individual, as well as income from relevant overseas entities held, controlled or managed by the trust, shall be taxed in the hands of the tax resident individual on an annual basis, regardless of whether distributions are actually made.
Such income mainly includes:income from transfer of property;interest, dividends and bonuses.
Both categories are subject to a 20% IIT rate. IIT already paid by the tax resident on trust income will not be levied again upon actual distribution.Note: Trust administration fees, trustee fees, legal service fees and investment advisory fees are not deductible against taxable income.
3. Trust Termination and Change of Resident Status
Upon termination of an offshore trust established by a tax resident individual, the total liquidation proceeds of all trust assets shall be treated as taxable income under "interest, dividends and bonuses".If an offshore trust established by a non-tax resident individual terminates and a tax resident individual acquires the trust assets, the fair market value of the assets at the date of trust termination shall be the taxable income.
The announcement also sets out tax treatments for scenarios where a tax resident becomes a non-tax resident, the death of a tax resident, and succession of an offshore trust by another individual.
III. Parties Requiring Special Attention
The new rules mainly apply to:tax resident individuals who have contributed or plan to contribute assets to offshore trusts;non-tax resident individuals who contribute China-sourced assets to offshore trusts;tax resident individuals receiving distributions or other economic benefits from offshore trusts established by non-tax residents;tax resident individuals who exercise actual control over assets contributed to offshore trusts by non-tax residents;individuals holding foreign nationality or long-term/permanent overseas residence rights, but whose main economic interests derive from mainland China and may therefore be deemed Chinese tax residents;family offices, trustees and professional service providers assisting families with trust, tax, legal, valuation and filing matters.
IV. Major Filing Deadlines
Asset contribution by tax residents: 1 March to 30 June of the following year;Income from ongoing trust operations: filing for the prior year from 1 March to 30 June each year;China-sourced asset contribution by non-tax residents: within 15 days of the following month if tax is payable;Trust termination: within 15 days of the month following completion of liquidation;Change from tax resident to non-tax resident: within 15 days of the month following the status change.If liquidation of an offshore trust is not completed within 60 days after its termination, the 60th day shall be deemed the date of liquidation completion.
V. 90-Day Transitional Arrangement for Existing Trusts
The 90-day transitional filing period covers:Unpaid IIT arising from asset contributions made by tax resident individuals to offshore trusts between 1 January 2023 and 31 December 2025;Unpaid IIT arising from asset contributions made by non-tax resident individuals to offshore trusts between 1 January 2023 and the effective date of the announcement, applicable only to income from transfer of China-sourced property;For income generated by offshore trusts of tax residents prior to 1 January 2026, no categorisation of income types is required, and tax residents shall file under "interest, dividends and bonuses";Distributions made by offshore trusts established by non-tax residents to tax residents prior to 1 January 2026 shall be filed by the tax resident recipients.
Taxpayers must complete filing and payment within 90 days of the announcement’s effective date. No late payment surcharge will be imposed for timely compliance; failure to pay on time will be handled in accordance with the Tax Collection and Administration Law.
VI. Other Important Rules
No cross-category deduction of income: losses from property transfer cannot offset interest, dividends and bonus income, and property transfer losses cannot be carried forward to future tax years. Assets transferred via distribution, gift, allocation or low-price disposal may be taxed based on fair market value.Certain economic benefits deemed as distributions: loans, guarantees, expense reimbursements, free or heavily discounted use of trust assets provided by an offshore trust of a non-tax resident to a connected tax resident individual may be treated as income distributions to that individual.Overseas entity and control tests: an overseas entity will be subject to the rules if passive income accounts for over 50% of its total profits, it lacks substantive operations, it makes non-operational payments for individuals, or its business decisions are not made by its actual controller. "Control" includes direct or indirect ownership of over 25% equity interests, or de facto control.Multiple contributors to a single trust: where two or more tax residents contribute assets, tax liabilities are allocated proportionally based on asset values at the time of contribution. Where tax and non-tax residents jointly contribute to the same trust, all assets are deemed contributed by the tax resident individual.Foreign tax credit: IIT paid overseas by a tax resident in respect of the offshore trust may be credited against domestic IIT payable in accordance with the law.Documentation and valuation requirements: if taxpayers cannot provide authentic and complete documentation to prove reasonable commercial purpose and arm’s length principles, tax authorities may make adjustments. Where asset values cannot be provided or are clearly unreasonable, professional valuation may be required.
FOIHK Notice
Families and professional institutions with offshore trusts are advised to prepare the following documents first:Tax resident status documents of settlors, actual funders, controllers and beneficiaries;Trust deeds and records of all previous asset contributions;Original cost, fair market value and valuation reports of assets;Annual income and transaction records of the trust and relevant overseas entities defined under the announcement;Records of all distributions, loans, guarantees and reimbursed expenses;Tax certificates and proof of overseas payments of income-tax-like levies in respect of the offshore trust under local foreign laws.
Tax filing obligations and calculation methods vary depending on the settlor’s status, source of assets and trust terms, and shall be assessed on a case-by-case basis.FOIHK will further analyse the practical impacts of these new regulations on cross-border family wealth planning, Hong Kong family offices and related professional service providers in subsequent articles.
Official Sources
MOF & STA: Announcement on IIT Matters Relating to Offshore Trusts
Department of Tax Policy of MOF & Income Tax Department of STA: Press Q&A
Disclaimer
This publication is for general information and industry discussion only and does not constitute individual investment, legal or tax advice. Specific filing deadlines, required documents and tax treatments shall be subject to the latest requirements of competent tax authorities. Professional advisors with relevant qualifications should be consulted on a case-by-case basis.