China's New Tax Regime for Offshore Trust: Base Protection at What Cost?

On 24 July 2026, China introduced a comprehensive individual income tax regime for offshore trusts through Announcement No. 21 and No.15. The regime taxes contributions, income earned during the trust’s life and gains on specified exit events. This article examines its effectiveness in protecting the tax base and its costs in terms of double taxation, ability to pay and legal certainty.

I. China’s Own BEPS Moment

Since around 2021, fiscal pressure and tighter tax administration have driven China to strengthen the statutory and enforcement foundations of its tax system. These developments amount to a Chinese base erosion and profit shifting (BEPS) moment: an effort to bring previously untaxed cross-border profits and grey-zone income within the tax net. The new offshore trust regime is part of this broader strategy of protecting the tax base.

Unlike jurisdictions that introduced domestic trust taxation before adopting special offshore rules, China has regulated offshore trusts despite having no dedicated tax regime for domestic trusts. This departure from the conventional sequence rests on three interrelated foundations, both practical and legal:

First, offshore trusts are commonly used by ultra-high-net-worth individuals and therefore overlap with the groups targeted by the policy of “common prosperity”. In the absence of dedicated tax rules, such structures could be used to move Chinese assets offshore, defer or avoid tax, and place wealth beyond the effective reach of the tax authorities. Their regulation thus serves both revenue collection and distributive fairness.

Second, gaps in the existing tax system allowed unrealised gains to leave China’s taxing jurisdiction at little or no tax cost. Before Announcement No. 21 (the “Announcement”), Chinese tax law did not comprehensively address contributions to, income accumulated in, or distributions from offshore trusts. Nor does the Individual Income Tax Law (IIT Law) impose a general exit tax. A resident could therefore transfer appreciated assets to an offshore trust and subsequently use residence planning to remove the gains permanently from China’s tax base.

Third, successive amendments to the IIT Law have provided the legal and administrative tools needed to regulate offshore trusts. Chinese residents are taxable on their worldwide income, and the 2018 amendments strengthened the reporting of foreign-source income, inter-agency information sharing and the general anti-avoidance rule (GAAR) for individuals. The new offshore trust regime builds on these tools and may be understood as a specific application of China’s broader offshore anti-avoidance framework.

II. Base Protection by Design

In designing its first offshore trust tax regime, China drew on foreign experience but prioritised tax-base protection and administrative efficiency over private-law considerations, including autonomy, property rights and ability to pay. The regime disregards the separation of legal ownership from beneficial interests and instead treats the resident contributor as the single point of tax attribution. This approach supports a look-through system covering every stage of the trust’s life cycle.

A. At Settlement: Deemed Disposition

A Chinese resident’s contribution of assets to an offshore trust is treated as a taxable transfer of property. IIT is imposed at 20% on the assets’ fair market value less their tax basis and reasonable expenses.

The rule applies regardless of whether the trust is revocable or whether the contributor retains control or an interest in the trust property. This differs from the US approach, under which taxation depends on factors including revocability, the grantor’s retained powers and the presence of US beneficiaries (IRC §§ 671–679, 684). The Chinese regime therefore disregards the allocation of rights within the trust.

Moreover, to prevent taxpayers from eroding the tax base by routing transfers through non-residents, the Announcement establishes two deemed contributor rules under the principle of substance over form:

• Control-based attribution. Where property is transferred into the trust nominally by a non-resident but is in fact controlled by a resident, the tax law looks through the nominal arrangement, treats that resident as the contributor in substance, and taxes the resident accordingly.
• Full attribution rule. Where a resident and a non-resident contribute jointly, all trust property is attributed to the resident, regardless of the resident’s actual share.

The Announcement further broadens residence-based taxation by defining Chinese domicile by reference to the “source of a person’s principal economic interests”, apparently without requiring habitual residence. It also states that foreign nationality or permanent or long-term residence abroad does not, by itself, alter a person’s status as a Chinese tax resident.

B. During the Trust's Life: Two-Tier Look-Through

During the holding period, the offshore trust is treated as fully transparent, and the resident contributor remains the sole taxpayer. The contributor must account annually for income realised at the trust level, whether or not the trust has actually made distributions to beneficiaries. This operates through a look-through mechanism that runs at two levels:

• First level: look-through of the trust. Where the trust holds assets directly, all income derived by the trust in a given year is attributed directly to the resident contributor and included in that person's taxable income for the year.
• Second level: look-through of the underlying entity. Where the offshore trust holds, controls or manages in-scope foreign entities (underlying entities) indirectly through a multi-tier structure, the tax law looks through both the trust and the entity. The profits realised by the underlying entity in a given year are treated as income of the resident contributor, even if the underlying entity has made no distribution to the trust.

In substance, this design is an expanded controlled foreign company (CFC) rule tailored to individual contributors. It covers the situations addressed by conventional CFC regimes, such as where passive income exceeds 50% of total income or the entity carries on no substantive business activity. In addition, it extends to foreign entities that bear unrelated personal expenses for the individual or that lack independent decision-making capacity. However, it does not require the entity to be located in a low-tax jurisdiction and provides no general active-business exemption or safe harbour.

C. On Exit: Deemed Realisation

Unrealised gains are not taxed annually but become taxable upon specified exit events. The gain is calculated as the difference between the trust property’s fair market value and its tax basis and is taxed at 20% as “income from interest, dividends and bonuses”.

Three events trigger deemed realisation. First, upon termination of the trust, the remaining trust property is taxed to the original resident contributor (Article 5). Second, upon the contributor’s death, deferral continues if a resident succeeds to the contributor’s position; otherwise, the gains are realised and the trustee or its designated domestic institution must file and pay on the deceased contributor’s behalf (Article 7). Third, if the contributor becomes non-resident, unrealised gains are recognised at fair market value and taxed to the contributor (Article 6).

The latter two rules operate as limited exit-tax provisions, taxing appreciation accrued during Chinese residence before it leaves China’s taxing jurisdiction. They do not, however, amount to a general exit tax: the IIT Law’s tax-clearance requirement upon deregistration of household registration applies only to tax already due and unpaid, not to unrealised gains.

III. The Costs of Base Protection

The Announcement extends China’s tax reach over offshore trusts but creates three concerns: double taxation and treaty conflict, ability to pay, and the legality of the new rules.

First, the regime creates risks of double taxation and treaty conflict. Although Article 10 permits foreign tax credits, it is unclear whether this covers corporate income tax paid by a trust or an underlying entity. Nor does the Announcement provide for basis adjustments when previously taxed income is retained in the trust, or when China taxes unrealised gains upon contribution or exit. The same income or gain may therefore be taxed more than once. Treaty conflicts may also arise where a taxpayer is treated as resident in China under the principal-economic-interests test but resident elsewhere under an applicable treaty’s tie-breaker rule.

Second, the regime raises ability-to-pay concerns and may constrain legitimate trust functions. Many jurisdictions attribute offshore trust income to the settlor only in specified circumstances, such as where the settlor retains an interest or the trust has a domestic beneficiary. The Announcement, by contrast, taxes the contributor regardless of whether they retain control over, or can benefit from, the trust. A contributor may therefore incur tax on income retained in the trust without having either a legal entitlement to that income or the cash needed to pay the liability.

The taxation of unrealised gains upon contribution or a change of tax residence creates a similar liquidity problem, particularly where the trust holds shares or other illiquid assets. These burdens may also constrain trusts established for legitimate purposes, including asset management and succession planning. Although the Announcement contains a substantive-business-activity exception for underlying entities, it provides no broader safe harbour for such arrangements. Its expansive anti-avoidance approach may therefore deter ordinary wealth planning and discourage offshore wealth from being returned to China.

Third, the Announcement’s legal basis is arguably questionable. The regime introduces substantive tax rules through a normative document issued by the two ministries. Its provisions on deemed disposition, realisation upon exit, look-through treatment and an economic-interest-based domicile test determine who is taxed, on what income and when. They therefore concern core elements of the tax system that the Legislation Law (Article 11(6)) reserves to legislation by the national congress.

The existing IIT Law provides insufficient authority for these changes. The look-through provisions relax the statutory CFC conditions concerning a low effective tax burden and the absence of reasonable business needs. Reliance on the GAAR is also problematic: a power to make adjustments in individual cases does not clearly authorise the imposition of generally applicable self-reporting obligations.

This uncertain legal basis also raises questions about the application of the rules to existing structures and to income arising before their effective date. Although the Announcement responds to an immediate anti-avoidance concern, legal certainty requires either an amendment to the IIT Law or express legislative authorisation, together with clear transitional rules.