HKEJ Column: Offshore Trusts Bid Farewell to the Grey Era

China’s Ministry of Finance and the State Taxation Administration recently jointly issued the Announcement on Matters Concerning Individual Income Tax on Offshore Trusts (Announcement No. 21 of 2026). This document, dubbed by the industry the “new tax rules for offshore trusts,” sets out extremely clear individual income tax filing rules for the entire life cycle of an individual placing assets into an offshore trust, including the pass-through of income during the trust term, as well as liquidation and changes in identity. Many market participants interpret this as a “heavy tax hike” on offshore wealth and even feel anxious. However, from the professional perspective of long-term investment and family governance, my view is exactly the opposite: Announcement No. 21 is not simply a “tax increase notice,” but an institutional milestone in which offshore trusts move from a “grey, uncertain state” to a “highly transparent, predictable compliance framework.”

Over the past decade or more, offshore trusts were often regarded by high-net-worth families as tools for concealing assets or tax arbitrage. But as the Common Reporting Standard (CRS) solved the information-transparency question of “who owns offshore assets,” Announcement No. 21 now thoroughly answers the implementation details of “how offshore trusts are taxed.” The new rules explicitly provide that: placing assets into a trust is deemed a transfer, with individual income tax of 20% payable on the difference; income during the trust term is passed through to the settlor and must be reported annually whether or not distributed, with operating expenses not deductible and losses not carried forward; the death of the settlor or a change in tax residency triggers tax liquidation; and even non-resident trusts that are “actually controlled” are included in the scope of pass-through taxation. This means that the space for tax arbitrage through nominee holdings, ambiguous control rights, or hybrid trusts has been substantially narrowed. On the surface, the implementation of the regime increases explicit tax costs, but in reality it eliminates the highly destructive risks of late-payment penalties and anti-avoidance clawbacks. For genuine family wealth, a “calculable cost” is always far safer than an “unpredictable compliance poison.”

In the course of managing assets and serving family clients, I often emphasize: the first task of wealth management is defense; offense comes second. Under the new normal of Announcement No. 21, the primary risk facing family wealth is no longer the market price fluctuation of a single asset, but compliance risk at the structural level. The era of relying solely on one offshore trust contract for a “once-and-for-all” solution is over. In the face of pass-through regulation, a single tool is no longer sufficient to address a complex cross-border tax and regulatory environment; families must adopt an integrated “combination punch.” This is precisely the critical juncture at which the role of the family office undergoes an essential upgrade. The family office is no longer merely an investment advisor helping the family buy stocks and make allocations; it is upgrading into a strategic platform for family governance and cross-disciplinary coordination.

China’s “first-generation” entrepreneurs are now entering the peak period of intergenerational succession, and market estimates suggest that more than RMB 20 trillion in wealth will be handed over in the next decade. The core functions of offshore trusts in asset isolation, family governance, and cross-border integration have not disappeared, but they must operate within a family office structure with institutional-grade discipline. A mature family office should, on the premise of compliance, organically integrate the following four dimensions: 1) Top-level structural compliance: design lawful and compliant holding and trust structures by leveraging the tax incentives of international financial centers such as Hong Kong (e.g., the Qualifying Family-owned Investment Holding Vehicle (FIHV) tax concession). 2) Cross-cycle asset allocation: use rigorous institutional-grade risk control to lock in long-term quality assets amid volatile markets. 3) Professional service coordination: integrate legal, tax, audit, custody, and trust institutions across borders to eliminate operational loopholes. 4) Family governance and succession: institutionalize entrepreneurial spirit and family values to ensure that wealth transitions smoothly to the next generation.

In conclusion, the introduction of Announcement No. 21 marks the formal entry of offshore wealth management into a new era in which “compliance is king.” Compliance has never been a cost that hinders wealth growth; rather, it is a moat for the enduring success of a family enterprise. Only by embracing transparency and establishing a rigorous institutional-grade governance system can family wealth truly achieve cross-generational protection and succession amid changing times. “Constant as the waxing moon; Rising as the soaring sun.” The succession of family wealth requires both the business expansion power of the rising sun and the steady risk-control power of the constant moon.