On 24 July 2026, the Ministry of Finance and the State Taxation Administration issued the Announcement on Individual Income Tax Matters Concerning Offshore Trusts (Announcement No. 21 of 2026). The State Taxation Administration released its supporting administration announcement (No. 15 of 2026) on the same day. Together, the two documents build a complete individual income tax administration system for offshore trusts set up by Chinese resident individuals, ending the long-held market assumption that retained income kept inside an offshore trust is not distributed and therefore not taxable in China. High-net-worth individuals who have already established — or plan to establish — offshore family trusts, and anyone with cross-border asset arrangements, now need to re-assess the tax compliance of their structures.

AC Core Highlights

1. Which Trusts and Structures Fall Within Announcement No. 21?

It applies to offshore trusts established under foreign legal frameworks by Chinese resident individuals. The test is not merely whether a vehicle is called a "trust" — offshore structures that in substance constitute a trust arrangement are equally covered. Standardised publicly offered financial products from banks, insurers and securities firms are excluded.

Assets in scope: equity interests, real estate, listed shares, movable property of all kinds and financial assets. Where assets are transferred through third-party nominee holding but are in fact funded and controlled by a resident, they are also treated as contributed to the trust.

2. Individual Income Tax Rules at Four Stages

1) Establishment: contributing assets is deemed a transfer of property. Tax is assessed on fair value − original cost − reasonable expenses, at 20% as income from transfer of property; once paid, the tax basis is updated to fair value. Filing period: 1 March – 30 June of the year following the contribution.

2) Ongoing years: annual filing is required even when no income is distributed (the most significant change). Regardless of whether income is actually distributed, the resident settlor must file every year. Capital gains are taxed at 20% as income from transfer of property; dividends and interest at 20% as income from interest, dividends and bonuses.

· ✅ Income already taxed is not taxed again when later distributed.

· ⚠️ Management fees, legal fees and trustee remuneration are not deductible; losses from the two categories of income cannot be offset against each other; property transfer losses cannot be carried forward to another year.

3) Transfers of property within the trust. For related-party gifts, transfers at low prices and internal transfers, the tax authority may assess income at fair value; losses from related-party transfers may not reduce taxable income.

4) Termination and liquidation of the trust. Where property is returned or distributed to beneficiaries, tax is determined by the nature of the income; income already taxed is not taxed again. Documents must be submitted within 15 days of the month following completion of the liquidation, and where payment is difficult an instalment plan of up to 5 years may be filed for.

3. Controlled Foreign Entities: Look-Through Test

Meeting any one of the following conditions triggers look-through, and the resident individual bears the tax liability:

1. Passive income accounts for more than 50% of total annual profits

2. No substantive operations (no employees, no office premises, no real business)

3. Funds used for personal consumption or non-business expenditure

4. Business decisions are controlled by the settlor, with no independent decision-making power

Exceptions: licensed financial institutions, or offshore entities that can prove a reasonable business purpose and genuine substantive operations. Control test: directly or indirectly ≥25% of equity, voting rights or rights to income; for multi-layer structures, the ratios are multiplied and combined.

4. Non-Resident Settlors and Beneficiaries Including Chinese Tax Residents

Where a non-resident establishes an offshore trust whose beneficiaries include Chinese residents, the resident beneficiaries must declare individual income tax when income is distributed. Anti-avoidance rule: where economic benefits are channelled to Chinese residents indirectly through a third party, this is treated as a distribution of trust income and triggers the residents’ tax liability.

5. Other Key Rules

· Change of status: where a resident becomes a non-resident after contributing assets, the offshore trust individual income tax must be settled within 15 days of the following month

· Death of the settlor: where the trust passes to a non-resident, the trustee must file a settlement declaration within 15 days of the following month; where it passes to another resident, annual filing continues

· Trusts with multiple contributors: where several residents contribute together, each files separately; where residents and non-residents contribute together, the whole contribution is treated as made by residents and the residents bear the filing obligation

6. Supporting Administration and Reporting (Announcement No. 15)

In addition to Individual Income Tax Form B, the following must be submitted: the Schedule of Offshore Trust Individual Income Tax, the Annual Report of Offshore Trust Individual Income Tax, the trust’s financial statements, and supporting documents for income distribution.

7. Practical Impact

An offshore trust is no longer simply an asset-isolation plus tax-shield tool. Existing family trusts need to review their underlying structures, controlled foreign entities and retained earnings over the years, and to assess potential tax liabilities and annual filing obligations; for clients planning to set up a trust, China’s individual income tax compliance cost must be factored into the structure design from the outset.

If you would like us to review the compliance of your cross-border trust structure, please follow us to arrange a compliance assessment.

AC Consulting has served foreign-invested enterprises in China for more than 20 years, providing one-stop compliance advisory, corporate operation, tax, HR and visa services for foreign SMEs.

Disclaimer: This article is interpreted by AC Consulting for reference only. It does not constitute tax, legal or compliance advice. All implementation standards shall be subject to the latest official documents released by competent authorities.