By Sharon Taylor, In house Counsel and Group General Manager, Zetland Fiduciary Group
On 24 July 2026, China's Ministry of Finance and State Taxation Administration issued Announcement No. 21 together with STA Announcement No. 15, fundamentally changing the taxation of offshore trusts connected to Chinese tax residents. The new rules represent one of the most significant changes to Chinese private wealth planning in recent decades and will have profound implications for high-net-worth families, entrepreneurs, family offices, trustees, and offshore structures worldwide.
Historically, offshore trusts have been widely used by Chinese families for succession planning, asset protection, family governance, pre-IPO structuring and cross-border wealth management. Whilst Chinese tax law has always imposed tax on the worldwide income of Chinese tax residents, the practical application of those rules to offshore trusts remained uncertain. The new regime removes much of that uncertainty and introduces a comprehensive framework that taxes offshore trusts throughout their entire lifecycle.
What Has Changed?
The new rules apply to offshore trusts and similar arrangements established under non-PRC laws. Importantly, the authorities have adopted a substance-over-form approach and have indicated that structures performing trust-like functions may also fall within scope.
Under the new framework, a Chinese tax resident transferring assets into an offshore trust is generally treated as having disposed of those assets at market value. Any gain realised on the transfer is subject to Individual Income Tax (IIT), generally at 20%, calculated on the difference between market value and tax basis.
This is a major departure from traditional offshore trust planning, where the settlement of assets into a trust was often viewed primarily as a wealth planning exercise rather than an immediate tax event. Under the new regime, the act of establishing or funding an offshore trust may itself trigger a substantial tax liability.
Annual Taxation of Trust Income
Perhaps even more significant is the introduction of annual taxation on trust income.
The authorities have adopted what is effectively a look-through regime. Income generated by offshore trusts and, in certain cases, by offshore companies controlled by those trusts may be attributed directly to the settlor or relevant Chinese tax resident, regardless of whether funds are distributed.
This means that undistributed gains, accumulated income and retained earnings may still give rise to annual tax obligations. The traditional assumption that taxation could be deferred until an actual distribution is made has effectively been removed for many structures.
The rules also contain broad anti-avoidance provisions designed to prevent taxpayers from achieving the same economic result through alternative structures or nominee arrangements. Authorities will assess who genuinely funded, controls or benefits from the assets rather than relying solely on legal ownership records.
What does "look-through" mean?
Historically, many offshore trusts were viewed as separate legal arrangements. The settlor transfers assets into a trust, the trustee legally owns them, and beneficiaries receive distributions at some future date. Under that traditional model, taxation was often considered only when a distribution was actually received. The new Chinese rules largely reject that approach for tax purposes and instead apply a "look-through" methodology.
The tax authorities essentially ignore some or all of the legal layers and ask:
Who really owns, controls, enjoys or benefits from the economic value of these assets?
If the answer is that a Chinese tax resident settlor still effectively controls or benefits from the assets, then the trust may be treated as tax transparent. In other words, the trust exists legally, but for tax purposes the income can be attributed directly to the individual behind it.
Impact on Existing Structures
One of the most important features of the announcement is that it does not merely affect newly established trusts.
Existing offshore structures may also be subject to review. The authorities have introduced a 90-day compliance window for taxpayers with historic offshore trust arrangements. Individuals with unpaid tax liabilities relating to offshore trusts established between 1 January 2023 and 31 December 2025 may voluntarily disclose and settle relevant liabilities during the transition period without late payment surcharges.
This indicates a clear policy objective: encourage voluntary compliance now, while establishing the framework for much stricter enforcement in the future. Enhanced international tax cooperation, CRS reporting and increasing information exchange between jurisdictions have significantly reduced the opacity traditionally associated with offshore structures.
What About Offshore Companies Without Trusts?
It is important to note that the new rules are primarily targeted at offshore trusts and trust-like arrangements and do not automatically impose a 20% annual tax on offshore holding companies owned by Chinese residents. That said, offshore companies remain subject to scrutiny under China's existing tax framework. Chinese tax residents continue to be taxable on their worldwide income, and offshore structures remain subject to existing anti-avoidance, beneficial ownership and reporting requirements. The absence of a trust therefore does not, in itself, remove potential Chinese tax exposure.
Unlike the new trust regime, there is no blanket annual attribution of undistributed profits simply because an offshore company exists. Instead, taxation will generally arise when income is realised or received by the Chinese resident shareholder, whether through dividends, capital gains, investment returns or other taxable receipts. However, structures that accumulate profits offshore without genuine commercial substance or a legitimate business purpose may increasingly attract attention as China continues its move towards greater transparency, international information exchange and a substance-over-form approach to the ownership and taxation of offshore wealth.
The distinction between active operating businesses and passive holding companies is therefore likely to become increasingly important. Offshore companies with genuine commercial substance, employees, offices and operating activities are generally in a stronger position than passive investment vehicles established solely to hold wealth or accumulate investment income offshore.
As a practical matter:
· A genuine operating company in Singapore, Hong Kong or the UAE with employees, customers and commercial activities is generally less likely to attract challenge solely because it is offshore.
· A passive BVI or Cayman holding company accumulating investment income with little or no commercial substance may face greater scrutiny regarding beneficial ownership, tax residency, control and the ultimate taxation of profits.
· Structures that rely solely on offshore accumulation of income without corresponding commercial substance may become increasingly difficult to defend as China continues its move towards substance-over-form taxation.
Equally, the continued expansion of CRS reporting and international information exchange means that offshore corporate structures are significantly more transparent than in the past. The key question for clients is no longer whether offshore assets will be visible to tax authorities, but how those assets and structures will be characterised once identified.
Who Is Most Affected?
The new rules will be particularly relevant for:
· Chinese tax residents who have established offshore family trusts.
· Founders who hold shares in offshore holding companies through trust structures.
· Families using Hong Kong, Singapore, BVI, Cayman Islands or Jersey trust arrangements.
· Private investment structures involving offshore special purpose vehicles.
· Family offices using trusts as succession or governance vehicles.
· Beneficiaries receiving distributions from offshore trusts linked to Chinese source wealth.
The impact extends well beyond China itself. Hong Kong's wealth management industry has become a major hub for offshore trust structures serving mainland Chinese families. Consequently, trustees, fiduciary service providers, protectors, family offices and professional advisers throughout the region will need to reassess existing structures.
The End of “Tax-Neutral” Offshore Trust Planning
It is important to emphasise that offshore trusts remain highly valuable wealth planning tools.
Trusts continue to provide legitimate benefits including succession planning, protection against family disputes, asset segregation, confidentiality, governance mechanisms and continuity across generations. The new rules do not invalidate trusts or undermine their legal effectiveness. Rather, they challenge the long-standing assumption that offshore trusts could defer or eliminate tax obligations simply because assets were held outside China.
In practical terms, future trust planning must now place tax compliance alongside asset protection and succession planning as a primary consideration.
Tax Residency Changes: Emigration Is No Longer a Straightforward Solution
One of the most significant aspects of the new regime is its treatment of individuals who leave China after establishing offshore trust structures. A change in tax residency may trigger a deemed liquidation event, resulting in a tax liability even where no assets have been sold and no trust distributions have been made. The rules are specifically designed to prevent individuals from deferring taxation through offshore trusts and then avoiding tax by emigrating before trust income or gains are realised.
Just as importantly, obtaining foreign citizenship, permanent residence or overseas immigration status does not automatically mean an individual will cease to be regarded as connected to China for tax purposes. The authorities have indicated that ongoing economic ties, business interests and substantive connections to China may remain relevant when assessing an individual's position.
For internationally mobile entrepreneurs and families, relocation planning and trust planning should therefore be considered together, with appropriate tax advice obtained before implementing any change in residency status.
Recommended Client Action Plan
Clients should avoid panic, but they should not delay.
As a matter of priority, affected families should undertake a comprehensive review of all offshore structures, including trusts, foundations, private trust companies, offshore holding companies and family office arrangements.
Zetland recommends the following immediate steps:
First, identify all offshore trusts and related entities with Chinese settlors, beneficiaries or underlying assets.
Secondly, conduct a tax exposure assessment covering settlement transactions, historical income and accumulated gains from January 2023 onwards.
Thirdly, review governance arrangements and reserved powers to determine whether the structure may be viewed as effectively controlled by the settlor.
Fourthly, gather supporting documentation, valuations, financial statements and trust records in preparation for potential disclosure obligations.
Finally, consider proactive restructuring where appropriate, including enhancing commercial substance, simplifying structures, reducing unnecessary complexity and ensuring robust reporting systems moving forward.
Looking Ahead
The announcement marks a clear shift in China's approach to offshore wealth. The direction of travel is unmistakable: greater transparency, greater reporting obligations and greater alignment between legal ownership and economic taxation.
For families with international wealth structures, the issue is no longer whether offshore trusts will be scrutinised, but how prepared those structures are for the new reality. Well-designed trusts will continue to serve essential succession and governance functions. However, compliance, transparency and ongoing professional oversight will become increasingly important components of successful wealth preservation strategies.
The coming 90-day transition period presents a critical opportunity for affected families to assess their position, regularise historical issues and position themselves for long-term compliance under the new regime. For families without a trust but using offshore companies as wealth holding vehicles, now is an appropriate time to review commercial substance, management and control arrangements, beneficial ownership disclosures and succession planning objectives. While the new offshore trust rules may not directly apply, they demonstrate a broader policy shift towards substance-over-form taxation and a greater focus on economic ownership and effective control of offshore wealth.
Disclaimer: This article provides general information only and does not constitute legal or tax advice. Clients should seek specific advice based on their individual circumstances before taking any action.
