China offshore trust tax sets 20% levy and 90-day settlement window

China’s offshore trust tax rules, announced by the finance ministry and tax authority on July 24, bring asset transfers and income linked to offshore trusts into the individual income-tax net. The measures impose a 20% charge on gains in value when assets enter such structures and a separate annual 20% tax on specified income, while requiring settlement of certain historic liabilities within 90 days, Reuters reported.

The authorities did not provide an estimate of the funds held overseas, Reuters said. Offshore trusts had long occupied a grey area in Chinese tax enforcement.

How does China’s offshore trust tax work?

Under the rules, a transfer of shares, property or other assets into an offshore trust triggers a 20% tax on the appreciation in their value at the time of transfer, according to Reuters. Income generated by offshore trusts and by offshore entities they control will also be taxed annually at 20%.

The distinction matters. The first charge concerns the gain embedded in an asset when it is transferred; the second applies to relevant income produced after it is held through the trust or a controlled offshore entity. Reuters reported that the authorities also introduced anti-avoidance provisions: people who obtain foreign citizenship or overseas permanent residency may still be treated as Chinese tax residents where their main economic interests remain in China.

What is the deadline for past offshore-trust tax?

Tax unpaid on assets placed in offshore trusts since January 2023, and on trust income received before 2026, must be settled within 90 days to avoid late-payment penalties, Reuters reported. CNBC identified Oct. 22 as the end of that window. Reuters said larger unpaid amounts could be subject to a longer recovery period, while evasion could result in back taxes, surcharges and fines.

The compliance timetable has prompted requests for legal and banking advice among China-linked wealthy families, according to lawyers and advisers interviewed by CNBC. They said clients were seeking to establish whether the rules apply to them, calculate potential liabilities and determine how to fund payments.

Why could payment be difficult for some trust holders?

Trust holdings may include operating-company interests, pre-initial-public-offering stakes, property and other assets that may be illiquid and difficult to value, CNBC reported. Historical banking and trading records can also be hard to obtain, according to the report.

Kia Meng Loh, chief operating officer and senior partner at Dentons Rodyk in Singapore, told CNBC that clients were considering distributions, asset sales, financing and instalment plans. Ryan Lin, a director at Bayfront Law, told the network that many of his clients expected to sell parts of their portfolios to meet liabilities.

Richard Grasby, a partner at Appleby in Hong Kong, told CNBC that tax declarations would need to align with information foreign governments have supplied to Chinese authorities through the Common Reporting Standard. He also said using assets held in a trust to meet the tax bill could itself create an additional tax consequence.

The immediate reaction reported by advisers does not establish the number of taxpayers affected or the size of any resulting asset sales. For scale only, a KPMG and Hong Kong Trustees’ Association report cited by CNBC put total assets held under trusts in Hong Kong at HK$5.2 trillion, or US$667 billion, in 2023. That figure covers the wider Hong Kong trust industry and is not a measure of Chinese citizens’ taxable offshore-trust assets.

This story draws on original reporting from CNBC.