On July 24, 2026, China's Ministry of Finance and the State Taxation Administration jointly issued a landmark announcement clarifying the individual income tax (IIT) rules for offshore trusts, effectively ending long-standing ambiguities in this area .

Policy Background

Under China's Individual Income Tax Law, resident individuals are already required to pay tax on income derived from both domestic and overseas sources, a principle that aligns with international norms . However, enforcement in practice had been hindered by information asymmetry and vague rules in the past . As international tax cooperation has strengthened and data-sharing mechanisms have improved, the conditions for effective collection have now matured .

The policy targets the growing trend of individuals using offshore trusts—often established in jurisdictions with low information transparency—for intergenerational wealth transfer, cross-border asset allocation, and risk management, which some have exploited to transfer assets, conceal wealth, and evade taxes .

Taxation Rules by Trust Stage

The announcement breaks down the tax obligations into three stages :

1. Establishment Stage

When a resident individual transfers assets (such as company equity, stocks, or real estate) into an offshore trust, the taxable income is calculated as the market value of the assets minus their original cost and reasonable expenses. This is taxed as "income from transfer of property" at a rate of 20% .

For non-resident individuals transferring assets from within China, the same rule applies to the portion of gains derived from domestic sources. If a non-resident's transferred assets are effectively controlled by a resident individual, the resident is deemed the taxpayer .

2. Operational Stage

During the trust's lifetime, any income generated by a resident individual's offshore trust—whether actually distributed or not—is subject to annual IIT. The income is taxed either as "income from transfer of property" or as "interest, dividends, and bonuses" at a 20% rate, depending on its nature . Expenses such as trustee fees and management fees cannot be deducted from the taxable income .

For trusts established by non-residents, only income actually distributed to resident individuals is taxable as "interest, dividends, and bonuses" .

3. Termination Stage

When a resident individual's offshore trust is terminated, the liquidation gains of the entire trust property are taxed as "interest, dividends, and bonuses" at 20% . Special rules also apply when a resident individual changes their tax residency status or passes away during the trust's lifetime .

Anti-Avoidance Provisions

To protect China's tax revenue, the rules adopt a "substance-over-form" principle :

  • If property is transferred to a trust through intermediaries but is actually funded, controlled, or borne by an individual, that individual is deemed the taxpayer .
  • Undistributed trust income and income accumulated in controlled offshore entities are both subject to taxation .
  • Individuals who move abroad (including obtaining foreign nationality or long-term/permanent residency) but whose primary economic interests remain in China may still be treated as Chinese tax residents and taxed on global income .

Transitional Arrangements for Existing Trusts

For offshore trusts established before the announcement, the rules provide transitional treatment :

  • Establishment stage: Tax liabilities incurred more than three years ago (i.e., before January 1, 2023) will not be retroactively collected. For cases from 2023 onward, taxes must be paid within 90 days of the announcement's effective date, with no late-payment penalties for voluntary disclosure during this grace period .
  • Operational stage: Income accrued up to 2025 from existing trusts must be aggregated and declared as "interest, dividends, and bonuses," payable within 90 days . For large amounts, authorities may extend the collection period under the Tax Collection and Administration Law .

Compliance and Penalties

Taxpayers must file returns using designated forms and submit relevant documentation, including trust financial statements . Those facing payment difficulties can apply to the tax authorities for installment payments over five years .

The authorities have warned against intermediaries or individuals who induce taxpayers to conceal assets or evade taxes through offshore trusts, vowing to take enforcement actions against such violations under the law .

Expert Assessment

Experts view this policy as a refinement of existing laws rather than the introduction of new legislation, aimed at improving tax certainty and transparency . By bringing offshore trust taxation into clearer regulatory view, the move is expected to help stabilize taxpayer expectations, promote social equity, and protect national fiscal interests .