China's offshore trust tax: why unwinding now costs more

China's 2026 rules end the offshore trust as a tax deferral, not as a succession tool. A rushed wind-up adds an exit tax and loses the trust.

The individual income tax rules China published on 24 July 2026 can be read as the end of the offshore trust for mainland families. They end something narrower: the trust as a way to defer tax. What is left is what the structure was meant to be for in the first place, which is succession and protection. The families most likely to overpay are the ones rushing to wind up their trusts before the 90-day window closes on 21 or 22 October 2026. Under the new rules, ending a trust is itself taxed, and it does not cancel the tax already owed on assets put into the trust between 2023 and 2025. A family that collapses its trust in a hurry still owes the back tax, adds a 20% exit charge on top, and gives up the structure. A family that declares, keeps the trust and restructures it around where its members are actually tax-resident will usually pay less now, and keeps the trust.

What the two announcements say

There are two documents. Announcement No. 21 of 2026 of the Ministry of Finance and the State Taxation Administration sets the rules on what is taxed. State Taxation Administration Announcement No. 15 of 2026 sets out how to file and pay. Both took effect when they were published on 24 July 2026. The rate is 20% at every stage. That is the rate Article 3 of the Individual Income Tax Law, as amended on 31 August 2018, already applies to gains on selling property and to interest, dividends and bonuses.

Putting assets into a trust counts as selling them. Under Article 3 of Announcement 21, a resident individual who transfers property into an offshore trust is taxed on its market value at the date of transfer, less its original cost and reasonable expenses. The gain is taxed at 20% as a gain on the sale of property. Once that tax has been declared, the property's cost for tax purposes resets to its market value on the transfer date.

Income is taxed each year as it arises. Article 4 taxes the resident settlor every year on the income of the trust and of the foreign entities it holds, controls or manages, whether or not anything is paid out. Income falls into two baskets: gains on selling property, and interest, dividends and bonuses. Gains and losses in one basket cannot be offset against the other. Losses cannot be carried forward to a later year. Trustee, management, legal and investment advisory fees cannot be deducted. Income taxed this way is not taxed again when it is actually distributed.

Article 13 decides which underlying companies are caught. From 24 July 2026, a company is caught if any of these applies:

• passive income made up 50% or more of its total profit in the previous year
• it does not meet substance tests on staff, business address or accounts
• its money pays for personal spending or investment unrelated to its business
• its business decisions are not in fact taken by the company itself

Licensed, regulated financial institutions serving the public are excluded. So is any company that can prove it has a reasonable commercial purpose and real business operations, and the burden of proof sits with the taxpayer. Under Article 14, "control" means holding 25% or more, directly or indirectly. Any intermediate holding above 50% counts as 100%. Control can also be shown in practice, through control over funding, operations, purchasing and sales, or distributions.

Every way out is taxed. Article 5 taxes the end of a trust on the market value of everything it holds, less original cost and reasonable expenses, as interest, dividends and bonuses. Article 6 applies a similar calculation when the settlor stops being a Chinese tax resident. Article 7 applies it when the settlor dies and the trust passes to a non-resident or to no one. In that case the trustee, or a mainland entity the trustee appoints, files the return.

Article 15 of Announcement 21 and Articles 5 to 7 of Announcement 15 set the filing dates for these events. Each return is due by the 15th of the following month. For a trust that ends, that month is the one after liquidation is completed. A liquidation not finished within 60 days of termination is treated as completed on the 60th day.

Past transfers and income have to be declared. Under Article 17, four kinds of unpaid tax can be declared and paid within 90 days of 24 July 2026 without a late-payment surcharge:

• tax on property a resident transferred into a trust between 1 January 2023 and 31 December 2025
• for non-resident settlors, tax on China-source property transferred between 1 January 2023 and 24 July 2026
• tax on a resident's trust income that arose before 1 January 2026, reported as one sum of interest, dividends and bonuses
• tax on distributions made to residents before 2026 by trusts that non-residents funded

The wording is "申报缴纳", to declare and pay. Filing a return inside the window without paying does not, on the text, secure the relief.

Counting from the day after publication, the 90th day is Thursday 22 October 2026. Counting the day of publication itself, it is Wednesday 21 October. Advisers are split between the two dates: Han Kun gives 21 October, while KPMG and Caixin give 22 October. No official notice has settled it. Treat 21 October as the deadline. We have found no published extension as of 15 October 2026. After the deadline, Article 32 of the Tax Collection and Administration Law, as amended in 2015, charges a late-payment surcharge of 0.05% a day on the unpaid tax. That is 18.25% a year.

The officials' press questions and answers (Q&A), published on 24 July 2026, described the three-year look-back to 2023 as the general rule. Article 17 itself adds that where the unpaid amount is large, the tax authority may extend the recovery period under the Tax Collection and Administration Law. That law allows it. Article 52 gives the authority three years to recover tax unpaid through a taxpayer's error. That extends to five years in "special circumstances". Article 82 of the law's implementing rules, as amended in 2016, defines those as a cumulative shortfall of 100,000 yuan or more caused by a calculation or similar error. Where the shortfall is treated as evasion, there is no time limit. For a family that put a large holding into a trust in 2021, the 2023 start date is a matter of enforcement policy. It does not stop the authority going further back.

Three things the headlines miss

First: the rule on loans and free use applies to a different kind of trust. Loans, guarantees and below-market use of trust assets do not count as distributions for every trust. Article 12 applies only to trusts funded by non-residents. For those trusts, a payment out counts as a distribution to a related resident individual in four cases:

• a loan, or security given for the resident's debt, is still outstanding at 31 December
• the trust pays or reimburses the resident's expenses
• the resident uses trust property free or at a clearly low price
• the benefit goes through a third party, or to the resident's related parties or companies the resident controls

A trust funded by a resident does not need this rule, because Article 4 already taxes its income every year. Article 12 hits the family where a grandparent in Hong Kong or Vancouver funded the trust and a grandchild in Shanghai lives in a flat the trust owns.

Second: not all deferral has ended. The annual charge reaches realised income, meaning dividends, interest and gains on sales. It does not reach growth in value on assets the trust still holds. On our reading of Articles 4 to 7, that growth is taxed only when the asset is sold, the trust ends, the settlor stops being resident, or the settlor dies and the trust passes outside China's tax net.

Take a trust that holds shares in an operating company with real staff and its own decision-making. That company falls within the Article 13 exception, and the growth in its value stays untaxed until one of those events. The deferral that has ended is the one most families actually relied on: passive income piling up untaxed inside a British Virgin Islands (BVI) or Cayman Islands holding company.

Third: winding up is not a clean exit. Ending a trust is taxed under Article 5. Winding up does nothing to the Article 17 liability, which arose when the assets went in. A family that winds up instead of declaring still owes the past tax, and has now added a second charge.

A worked example

All figures are in renminbi (RMB). A mainland-resident founder transferred shares in a BVI holding company into a discretionary trust in March 2024. Her original cost was RMB 10 million. The shares were worth RMB 60 million on the date of transfer. The holding company has no staff and only passive income, so it is caught by Article 13. In 2024 and 2025 it received RMB 4 million of dividends and kept them. Today the trust is worth RMB 80 million, including that retained RMB 4 million.

Whatever she does next, Article 17 gives her this bill:

• on the 2024 transfer: (RMB 60m − RMB 10m) × 20% = RMB 10 million
• on income before 2026: RMB 4m × 20% = RMB 0.8 million
• total: RMB 10.8 million, to be declared and paid by 21 October 2026 to avoid the surcharge

Option A: wind up in October

Article 5 taxes the trust's market value less its cost for tax purposes. Once the 2024 transfer has been declared, that cost is RMB 60 million. So the taxable amount is RMB 80m − RMB 60m = RMB 20m, and the tax is RMB 4 million.

Article 4 says income already taxed is not taxed again when it is distributed. If the same logic carves the RMB 4 million of 2024–25 dividends out of the termination charge, the taxable amount falls to RMB 16 million and the tax to RMB 3.2 million. But Article 5 itself contains no such carve-out, and neither announcement says how one would work. She would have to prove which part of the value has already been taxed.

Her total bill this year is RMB 14.0–14.8 million. Under Article 8 of Announcement 15, the termination charge can be paid in equal instalments over up to five years if paying in full would cause hardship and she files for it before the filing period closes. On the text, the Article 17 back tax cannot. The assets come back into her personal name. Her succession plan and the trust's protection are gone.

Option B: declare and keep the trust

She pays RMB 10.8 million by the deadline. There is no instalment route for this payment. Article 8 of Announcement 15 limits five-year instalments to the charges on termination and on death, and the tax bureau will not accept a late or ineligible filing.

After that, she pays 20% each year on the trust's realised income. The RMB 16 million of growth since the transfer is taxed only when it is realised or the trust ends. Compared with Option A, she does not pay RMB 3.2–4.0 million early, and she keeps the trust.

The same facts, with the trust funded in 2021

If she had made the transfer in 2021, Article 17 would not reach it, subject to the look-back limits above. The charge on income before 2026 has no start date, so the RMB 0.8 million on the retained dividends is still due. While the trust continues, the RMB 50 million gain from before the transfer is not taxed.

Now suppose she winds the trust up. Announcement 21 does not say what the cost for tax purposes is for property put into a trust before 2023 when no tax was paid on the transfer. We have found no published rule for pre-2023 trusts. If the tax bureau uses her original RMB 10 million cost, the taxable amount on ending the trust is RMB 70 million and the tax is RMB 14 million. The three-year look-back had left that gain alone, and winding up exposes all of it. For older trusts, this is the most expensive mistake available.

Restructuring around residence

The rules depend on where people are tax-resident, not on where the trust is set up. Article 1 of the Individual Income Tax Law treats an individual as resident if they are domiciled in China or spend 183 days or more there in a tax year. Article 11 of Announcement 21 closes the obvious gap. A person with a foreign passport or permanent residence elsewhere can still be treated as domiciled in China if their main economic interests are there. Restructuring therefore has to follow where people actually live and earn. It cannot rest on paperwork. Within that limit, these are the moves that work:

• A settlor who is genuinely leaving. Article 6 charges 20% on the date residence ends, on market value less the cost for tax purposes. After that, the cost resets, and on our reading the trust is taxed as a non-resident's trust under Article 8. For the founder above, after her 2024 transfer is declared, the charge would fall only on growth since March 2024, not on the original RMB 50 million gain again. Payments to beneficiaries who stay resident in China are then taxed at 20% when they receive them, and Article 12 applies to loans and free use.
• Choosing who takes over the settlor's position. Under Article 7, a trust that passes on death to a non-resident is taxed at that point. A trust that passes to a resident carries on as before. Who takes over the settlor's rights is therefore a tax decision. It needs to be made, and written down, while the settlor is alive.
• Keeping family branches apart. Under Article 9, if residents and non-residents both contribute to one trust, it is treated as if residents had funded all of it. Branches of a family that live in different countries should have separate trusts.
• Checking the companies under the trust. The Article 13 tests separate a company with real operations from a holding company that only collects passive income. Merging passive holding companies, or giving a real business its own substance, changes which income is taxed each year.
• Using foreign tax credits. Article 10 lets a resident credit foreign personal income tax paid on the same trust against the Chinese tax for the year. The general credit rules are in Announcement No. 3 of 2020 of the Ministry of Finance and the State Taxation Administration, which caps the credit country by country. We have not confirmed how the two interact for trust income. This matters most for families with members in high-tax countries.

Before 21 October

Under a week is enough time to declare. It is not enough to plan a wind-up properly. The work, in order:

• List every transfer into the trust made between 1 January 2023 and 31 December 2025. Document the market value of each on the transfer date. That valuation sets the cost for tax purposes for everything that follows.
• Calculate the income before 2026 of the trust and of every company it controls under Article 13.
• Identify the tax bureau responsible. Under Article 1 of Announcement 15, it is the bureau where the main mainland company connected to the trust's assets is registered. If there is no such company, it is where the mainland property is, or where the taxpayer usually lives.
• Assemble the first-filing pack. Article 15 of Announcement 15 requires annual report forms for the year the trust was set up and for 2025, with the trust's historical financial statements. The official interpretation of Announcement 15, published in July 2026, says taxpayers can file in person at a tax service hall, with an online channel to follow.
• Before anyone signs a deed ending a trust, model the cost of winding up against the cost of keeping it.

A family that misses the window should still declare. The tax is then due with the daily surcharge. A shortfall the authority treats as evasion also carries a fine of 50% to five times the unpaid tax under Article 63 of the Tax Collection and Administration Law.

The deadline to declare is fixed. Deciding what happens to the trust is not tied to it, and should not be rushed into it.