In-depth interpretation of the 'Announcement on Personal Income Tax Matters Concerning Offshore Trusts' (Ministry of Finance and State Taxation Administration Announcement No. 21 of 2026)

1. Nominee Holding Piercing Rule: Where an individual transfers assets into an offshore trust through another individual or organization as nominee, such transfer shall be deemed as directly conducted by the individual himself/herself—and the individual shall bear full tax liability—if the assets were funded and effectively controlled by that individual, thereby eliminating asset concealment under third-party names. 2. Multi-tier Entity Piercing: The scope of taxation covers all assets and income held directly by the offshore trust, as well as those held indirectly through one or more layers of overseas entities. This prohibits deferring tax liabilities or hoarding profits by constructing layered offshore corporate structures. 3. Tightened Tax Residency Criteria: Even if an individual acquires foreign nationality or permanent residency abroad, he/she may still be classified as a PRC tax resident—subject to taxation on global income (including offshore trust income)—if his/her principal economic interests remain rooted in mainland China. 4. Disallowance of Related-Party Transactions: Losses arising from property transfers to related parties of the offshore trust shall not be used to offset capital gains realized in the same tax year, preventing artificial loss creation for tax avoidance purposes. IV. Reporting, Administration, and Transitional Arrangements for Existing Trusts 1. Reporting Deadlines by Scenario Scenario Deadline Reporting Party Resident individual transferring assets into trust March 1 – June 30 of the following year (individual income tax annual settlement period) Resident individual settlor Annual income during trust’s ongoing existence March 1 – June 30 annually (for prior-year income) Resident individual settlor Trust termination and liquidation Within 15 days after completion of liquidation Taxpayer / trustee (acting on taxpayer’s behalf) Change from resident to non-resident Within 15 days after change of status Taxpayer himself/herself Death of settlor Within 15 days after death Trustee / successor 2. Documentation Requirements First-time filing requires submission of the trust deed, detailed asset list, and organizational chart of the trust; annual filings require submission of the trust’s financial statements, operational income and distribution details, and completion of the ‘Detailed Tax Return for Individual Income Tax on Offshore Trusts’ and the ‘Annual Report on Individual Income Tax for Offshore Trusts’. 3. Transitional Policy for Existing Trusts • Applicable Scope: Offshore trusts into which assets were transferred before January 1, 2026, and any unreported income accrued in prior years; • Grace Period: No late-payment surcharges will be imposed if supplementary reporting is completed within 90 days from the announcement’s effective date; • Consequences of Late or Non-filing: Tax authorities will lawfully recover unpaid taxes, impose late-payment surcharges, and administer penalties under the Tax Collection and Administration Law; • Installment Payment: Where lump-sum payment poses genuine hardship for existing trusts, taxpayers may apply for备案 (filing) to pay taxes in five equal annual installments. V. Practical Case Studies Case 1: Establishment Stage — Transfer of Shares in an Overseas Listed Company Basic Facts In August 2026, Mr. Zhang, a PRC resident, transferred shares in an overseas listed company—originally acquired for RMB 5 million and valued at RMB 20 million on the transfer date—into a BVI family trust. No other reasonable expenses applied. Tax Treatment 1. Transferring assets into the trust is treated as a deemed transfer of property; taxable income = RMB 20 million − RMB 5 million = RMB 15 million; 2. Payable individual income tax = RMB 15 million × 20% = RMB 3 million; 3. Mr. Zhang must complete tax declaration and payment during the individual income tax annual settlement period (March 1 – June 30, 2027); 4. Upon completion of tax payment, the trust’s tax basis for these shares is adjusted to RMB 20 million, and future disposals will calculate appreciation based on this new cost basis.

Line-by-line breakdown of Announcement No. 21

Case: In 2015, Mr. Sun purchased equity in Company A for RMB 10 million. By 2026, the equity’s value had appreciated to RMB 100 million. To facilitate wealth succession, Mr. Sun transferred this equity into an offshore family trust. This does not mean, however, that ‘no sale occurred to a third party, nor did I receive RMB 100 million in cash—so no tax is due.’ Clause 3 establishes the principle that the act of transferring assets into a trust constitutes a statutory ‘settlement point’ for accumulated appreciation up to that moment. Thus: RMB 100 million − RMB 10 million = RMB 90 million. Assuming no other allowable expenses, the taxable income equals RMB 90 million, subject to a 20% tax rate: RMB 90 million × 20% = RMB 18 million in individual income tax. To prevent double taxation, once the equity enters the trust, subsequent appreciation—for example, from RMB 100 million to RMB 130 million—is treated separately: the RMB 30 million incremental gain will be taxed later under applicable rules. In essence, Clause 3 bifurcates appreciation into two segments: pre-transfer appreciation (settled at the time of transfer), and post-transfer appreciation (calculated from the new RMB 100 million cost basis). A highly practical issue arises here: valuation. For instance, Mr. Sun claims his BVI company’s equity is worth only RMB 20 million—but the underlying Company A has just completed a financing round, clearly indicating a much higher enterprise value. Tax authorities will not automatically accept Mr. Sun’s self-declared RMB 20 million valuation. Clause 4 Topic 1 In plain language: Once you transfer assets into the trust, annual income generated by the trust—and by overseas entities it controls—must be reported and taxed each year, regardless of whether funds are actually distributed to you. Case: Mr. Sun establishes a family trust holding a BVI company, which in turn purchases stocks. This year, the BVI company bought stocks for RMB 100 million and sold them for RMB 130 million, realizing RMB 30 million in gains. Not a single yuan was distributed to Mr. Sun—the entire amount remains in the BVI company’s account. Previously, many assumed: ‘No money entered my personal bank account, so I have no income and owe no tax.’ But Clause 4 clarifies otherwise: All income generated by a resident individual’s offshore trust—and by overseas entities it holds, controls, or manages—must be declared and taxed annually. These RMB 30 million gains, derived from stock sales, are taxed as ‘income from property transfer’; dividends or interest income would instead fall under ‘interest, dividend, and bonus income’. Actual distribution is irrelevant—the income must be reported and taxed in the year it arises. If the BVI company had not sold stocks but instead: – Received RMB 5 million in dividends from a listed company; – Earned RMB 2 million in bond interest; – Received other dividends or bonuses; these amounts would constitute ‘interest, dividend, and bonus income’, and must likewise be declared—even if never distributed to Mr. Sun. Yet if the law applied only to income earned directly by the trust itself, circumvention would be trivial. For example: Mr. Sun holds a family trust; the trust holds a BVI company; the BVI company holds a Cayman entity; and the Cayman entity invests in stocks. If the law covered only income earned directly by the trust, evasion would be effortless. Mr. Sun could simply argue: ‘It’s not the trust earning the income—it’s the Cayman company.’ Hence, the regulation explicitly states: income generated by any overseas entity held, controlled, or managed by the offshore trust falls within the taxable scope.

Family Trust Sells 7,000 Oil-Dri (ODC) Shares at $80.27 Average

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