【BREAKING】New Offshore Trust Rules

01 “Deemed Transfer Upon Placement” One-time Full Taxation

Article 3 of the Announcement clarifies that when a resident individual places property into an offshore trust, the taxable income is calculated based on the market value at the time of placement minus the original cost and reasonable expenses, and individual income tax shall be declared and paid at the rate of 20% under the "income from property transfer" category. This tax payment is due at the time of placement. The original cost is simultaneously adjusted to the market value at the time of placement, thereby resetting the [book cost] base for subsequent years.

Special attention should be paid to Article 14's definition of ["control"] — direct or indirect aggregate holding of 25% or more of equity, voting rights, shares, beneficial rights, or similar interests is deemed to fall within the scope of control. For multi-layer indirect holdings, the holding ratio is calculated by multiplying across layers, and if an intermediate layer exceeds 50%, it is counted as 100%. This means that many family trust arrangements structured through BVI companies will be deemed, under a look-through approach, as offshore entities controlled by resident individuals.

02 Annual Deemed Distributions During the Trust's Existence; Reporting Required Even Without Actual Distributions

Article 4 of the Announcement stipulates that during the existence of a resident individual's offshore trust and the offshore entities controlled or managed by it, any income generated — regardless of whether actually distributed — shall be taxed on the resident individual as the taxpayer, and individual income tax shall be declared and paid annually under the categories of "income from property transfer" or "interest, dividends, and bonus income." Income that has already been declared and taxed will not be subject to further declaration upon actual distribution, to avoid double taxation.

However, two specific details must be noted. First, [income from property transfer] and [interest, dividends, and bonus income] cannot be offset against each other; each is calculated independently, and losses cannot be carried forward to subsequent years. Second, expenses incurred during the establishment and ongoing operation of the trust — such as trustee remuneration, trust management fees, legal service fees, investment advisory fees, and the like — may not be deducted from taxable income. This provision significantly narrows the scope for deferring tax liabilities through expense arrangements.

03 Termination, Death, and Change of Residency Status: Tax Liquidation Triggers at Three Specific Points

Articles 5, 6, and 7 of the Announcement establish a full-life-cycle liquidation framework for offshore trusts. Upon termination, the liquidation proceeds from all trust property are declared as "interest, dividends, and bonus income." When a resident individual changes to non-resident status, the tax is declared based on the market value on the date of status change minus the original cost. If a resident individual dies and the trust is inherited by a non-resident or has no successor, the trustee or its designated domestic agent shall declare the tax based on the market value on the date of death minus the original cost.

The tax treatment for these three scenarios bears similarities to corporate liquidation — in each case, the market value serves as the basis for tax calculation. The previous arrangement that long relied on ["cost unchanged, appreciation deferred until distribution to beneficiaries"] has been fundamentally abolished.

04 "Substance-over-Form" Approach Further Tightened for Cross-border Status

Article 11 is particularly noteworthy — ["An individual who has acquired foreign nationality or long-term or permanent residency abroad but whose primary economic interests originate from within China may be determined as a resident individual with domicile"]. This provision explicitly invalidates previous practices of switching tax residency status through immigration to avoid Chinese individual income tax.

Article 8 also stipulates that when a non-resident individual places property into an offshore trust, it is deemed as a property transfer by the individual, but tax is levied only on income sourced from within China. If there is actual control by a domestic resident, the placement is treated as if made by a resident individual and shall be executed in accordance with this Announcement. Furthermore, if an offshore trust established by a non-resident distributes income to non-resident individuals, but the income is actually obtained, used, controlled, or disposed of by other resident individuals, it shall be deemed as a distribution to those resident individuals.

05 Anti-Avoidance Provisions: Article 12 – Four Categories of Deemed Distributions

Article 12 of the Announcement brings common ["trust benefit reflux/round-tripping"] models under regulatory oversight, including: using trust property to directly or indirectly provide mortgages, guarantees, or loans for debts of resident individuals that remain unresolved by year-end; paying or reimbursing expenses for resident individuals, or allowing them to use trust property free of charge or at significantly below-market prices; transferring property, paying expenses, or providing other economic benefits to resident individuals through third parties; and providing the above economic benefits to related parties of resident individuals or organizations controlled or beneficially owned by them. The amount of deemed distribution income is determined based on the market value of the property actually obtained, used, or enjoyed, the amount of expenses paid, the amount of debts already repaid on behalf, or other economic benefits provided.

In conjunction with Article 13's definition of ["overseas entities"] — which includes entities where in the preceding tax year, dividends, interest, rents, royalties, property transfer gains, and trade/service income without operational risk collectively account for 50% or more of total profits; where employee headcount and registered business address do not meet substantive operational requirements; where funds are used for personal consumption or property expenditures unrelated to business operations; and where operational and production decisions are not actually made by the entity — the vast majority of typical "shell" companies will fall within this scope.

06 Transitional Arrangements: The 90-Day Window Is Critical

Article 17 of the Announcement provides transitional arrangements. For the period from January 1, 2023, to December 31, 2025, any individual income tax accrued but unpaid by resident individuals on property placed into offshore trusts, as well as by non-resident individuals on property placed from January 1, 2023, to the effective date of the Announcement, shall be declared and paid within 90 days from the effective date of the Announcement, without late payment penalties. For those with large amounts where payment poses genuine difficulties, the tax authorities may extend the collection period in accordance with the provisions of the Tax Collection and Administration Law.

For income generated during the trust's existence before January 1, 2026, regardless of income category, it shall be declared and paid as "interest, dividends, and bonus income" within the 90-day window, without late payment penalties. From January 1, 2026, the new rules officially take effect, and all placement activities and ongoing trust income shall be declared and paid in accordance with the Announcement's provisions.

Failure to pay within the prescribed time will result in late payment penalties. Where non-payment constitutes tax evasion, taxes, penalties, and late payment fees shall be recovered in accordance with the Tax Collection and Administration Law.

07 Filing Deadlines and Foreign Tax Credit Provisions

Filing deadlines: For the placement event, declaration shall be made between March 1 and June 30 of the year following the placement; during the trust's existence, declaration for the preceding year shall be made between March 1 and June 30 of each year; upon termination, declaration shall be made within 15 days of the month following completion of liquidation; upon the death of the resident individual, declaration shall be made within 15 days of the month following death; upon change to non-resident status, declaration shall be made within 15 days of the month following the change. If liquidation is not completed within 60 days, the 60th day shall be deemed the date of completion of liquidation. In cases of genuine difficulty, upon filing for record, payment may be made in installments evenly over a period of up to 5 years.

Taxes of an individual income tax nature already paid overseas in accordance with local laws may be credited against the current tax liability in accordance with the law, subject to the credit not exceeding the applicable limit and no double counting of credits.

08 Conclusion

The Announcement took effect from the date of issuance. The traditional practice of ["placing property into the trust without paying tax, deferring declaration until actual distribution to beneficiaries"] has essentially come to an end.

Existing offshore trusts should, within the 90-day transitional window, promptly review valuation at the time of placement, accumulated income during the trust's existence, and the list of controlled offshore entities, and prepare filing materials and documentation for foreign tax credits. For newly established trusts or additional contributions from January 1, 2026, the new rules will apply immediately.

Practical details involve valuation methodologies, recognition of foreign tax credit documentation, and evidence-gathering for controlled offshore entities, among other aspects. We welcome colleagues to share practical operational experiences in the comments section.