In a landmark development for China’s wealth management and tax compliance landscape, the Ministry of Finance (MOF) and the State Taxation Administration (STA) jointly released Announcement [2026] No. 21 today, introducing China’s first comprehensive individual income tax (IIT) framework specifically targeting offshore trusts and trust-like arrangements.
This new regulation marks a fundamental shift in China’s approach to offshore trust taxation, effectively ending decades of tax deferral opportunities for PRC tax residents utilizing offshore structures.
Under the new rules, a look-through taxation principle applies to offshore trusts settled by PRC tax residents. This means:
All income generated within an offshore trust — including retained earnings held in underlying offshore special purpose vehicles (SPVs) — will be attributed directly to the PRC resident settlor on an annual basis.
Taxation applies regardless of whether any cash or gains are actually distributed.
A flat 20% IIT rate applies to such attributed income.
This eliminates the previous ability to defer IIT by accumulating income inside offshore trust structures.
The Announcement adopts a substance-over-form approach. An "offshore trust" is defined broadly to include:
Trusts established under foreign (non-PRC) laws
Other legal arrangements performing substantially equivalent trust functions
Arrangements involving nominee or controlled transfers, where the individual funding, bearing risk, or controlling the assets is deemed the true settlor
Exempted: Standard regulated financial products issued by offshore banks, insurance companies, securities firms, and fund managers, offered to the general public and independently managed.
The Announcement sets out clear tax rules across three stages of the offshore trust lifecycle:
|
Lifecycle Stage |
PRC Resident Settlor / Beneficiary |
Non-Resident Settlor / Beneficiary |
|---|---|---|
|
1. Establishment / Settlement (Asset Injection) |
Taxable on capital gain = Fair Market Value (FMV) at transfer minus original cost and reasonable expenses. Cost basis stepped up to FMV upon tax payment. |
Taxable only on PRC-sourced property gains. If controlled by a PRC resident, deemed PRC resident settlement applies. |
|
2. Holding / Maintenance (Annual Income & Gains) |
Annual look-through tax: all earnings taxed to PRC settlor annually, whether distributed or retained. Subsequent distributions are tax-exempt. |
Taxed upon distribution to PRC resident beneficiaries. |
|
3. Termination / Liquidation |
Taxable on net liquidation gain upon distribution. |
PRC resident beneficiaries taxed on total FMV of distributed assets. |
Applicable IIT rate across all stages: 20%.
No deduction for trustee fees, management fees, legal retainers, or investment advisory expenses
Strict income segregation: capital gains ("Property Transfer") and passive income ("Interest/Dividends") must be calculated separately and cannot be offset against each other
No loss carry-forward: asset transfer losses may offset gains within the same tax year but cannot be carried forward
SPV look-through: earnings accumulated in offshore holding companies or SPVs controlled by the trust are fully captured as annual taxable income
To facilitate orderly transition, the Announcement includes key relief measures:
3-year statute of limitations: For trusts established more than three years prior to July 24, 2026, tax authorities will not retroactively pursue settlement-stage taxes on initial asset injection
90-day penalty-free grace period: For pre-existing trusts, unpaid tax on holding-period income accrued before the Announcement must be declared and paid within 90 days (by late October 2026). Taxpayers who complete filings within this window receive a full waiver of late payment interest and penalties
Exit tax on residency change: PRC resident settlors who convert to non-resident status will be subject to exit tax assessments on accrued trust gains
We recommend that families with existing or planned offshore trust arrangements take the following steps within the next 90 days:
Conduct a full trust portfolio audit – identify all offshore trusts, holding entities, and underlying asset cost bases
Review income stockpiles and distributable reserves – calculate historical retained earnings and assess taxable exposure under the grace period
Evaluate settlor and beneficiary tax residencies – analyze potential restructuring options
Align CRS data with tax filings – ensure consistency between Common Reporting Standard (CRS) disclosures and self-declared IIT returns
This summary is prepared for general informational purposes only and does not constitute formal legal, accounting, or tax advice. For tailored guidance, please consult qualified PRC tax lawyer or counsel.
