Recently, discussions around the declaration of overseas income by Chinese tax residents have continued to attract attention. According to several overseas media reports, tax authorities in Jiangsu, Shenzhen and other regions are intensifying tax inspections of offshore trusts that hold shares in certain Hong Kong-listed companies. The relevant trust holders have reportedly been required to declare detailed financial information, including dividends and investment gains from share disposals. In some cases, local tax authorities have also attempted to levy a 20% tax on investment gains, together with additional penalties.
The Economic Observer, a mainland Chinese media outlet, also confirmed in a related report that several executives of Hong Kong-listed companies had received calls from tax authorities in economically developed eastern coastal regions. They were asked to report detailed financial information regarding offshore trusts established overseas, including dividend income from overseas assets and investment gains from the purchase and sale of shares in Hong Kong-listed companies. The report further noted that the authorities had already taken action on the reporting of overseas asset income. In early 2025, Shanghai launched a special review requiring relevant individuals to declare overseas asset flows over the previous two to three years, including details of Hong Kong stock dividends and gains from equity transfers. Against the backdrop of weak economic growth and a widening budget deficit, China has been seeking broader sources of tax revenue. The authorities have strengthened efforts to tax large amounts of undeclared overseas assets held by residents, and after targeting ultra-high-net-worth individuals two years ago, the scope of review has expanded to middle-income groups.
An offshore trust is a trust structure established outside the settlor’s home jurisdiction, under which personal or family wealth is entrusted to an offshore trustee. It is commonly used for wealth succession, asset risk segregation and tax planning. Offshore trusts may be established in offshore financial centres such as the Cayman Islands and the British Virgin Islands, and may hold overseas assets such as shares in Hong Kong- or U.S.-listed companies. On the one hand, such structures are used for asset segregation and succession planning; on the other hand, they may seek to take advantage of exemptions from individual income tax, corporate income tax and capital gains tax available to offshore trusts in certain offshore financial centres. Their core logic lies in exploiting information barriers and tax differentials across jurisdictions.
When mainland Chinese enterprises seek listings in Hong Kong or the United States, they are often constrained by restrictions on foreign investment access. In practice, they commonly register a holding company in the Cayman Islands as the listing vehicle, then establish a Hong Kong subsidiary and a wholly foreign-owned enterprise (WFOE) in mainland China, which controls the domestic operating entity holding the relevant operating licences through contractual arrangements. This is generally referred to as a red-chip structure or a variable interest entity (VIE) structure. Companies such as Alibaba, Baidu and JD.com have all used similar structures for overseas listings.
With the widespread implementation of the OECD Common Reporting Standard (CRS), the room for tax concealment based on information asymmetry has narrowed significantly. Major offshore financial centres, including the Cayman Islands, the BVI, Hong Kong and Singapore, have implemented CRS and can automatically exchange non-resident financial account information with Chinese tax authorities. A series of regulatory actions has compressed the grey area for using offshore trust structures to conceal assets and defer taxation.
Taking Hong Kong as an example, under the CRS, financial institutions must comply with due diligence procedures under the Inland Revenue Ordinance (Cap. 112) to identify financial accounts held by tax residents of reportable jurisdictions, or accounts held by passive non-financial entities whose controlling persons are tax residents of reportable jurisdictions. They must also follow the Inland Revenue Department’s “Hong Kong Financial Account Information Return XML Schema and User Guide” by collecting and submitting the required account information to the Inland Revenue Department each year. Under that guide, if a passive non-financial entity has multiple controlling persons who are reportable persons, information on all such reportable persons must be reported. For offshore trusts established by mainland Chinese tax residents, the identity information of the settlor, trustee, protector and beneficiaries - as well as financial details such as year-end account balances, annual dividends and interest income - may be transmitted regularly to mainland Chinese tax authorities.
Based on the massive volume of data exchanged under CRS, and with the big-data matching capabilities of the Golden Tax system, tax authorities are capable of identifying the ultimate beneficiaries and actual controllers of offshore trusts with precision, and of forming preliminary judgments about the overall scale and income profile of overseas assets.
Specifically, offshore trusts may involve three stages of taxation.
First, the establishment of the trust and the contribution of assets. During the contribution of assets to a trust, the transfer of property ownership may trigger corresponding tax obligations. The contribution of cash assets generally does not involve individual income tax. The contribution of non-monetary assets, such as equity interests or real estate, requires particular attention. According to the Notice on Individual Income Tax Policies Concerning Investment by Individuals with Non-Monetary Assets, an individual’s investment with non-monetary assets is treated as both a transfer of non-monetary assets and an investment. Income derived from the transfer of non-monetary assets should be taxed under the category of “income from transfer of property” for individual income tax purposes, at a rate of 20%. The contribution of real estate may also involve value-added tax, deed tax and other taxes. In practice, however, the tax treatment of non-monetary assets contributed to trusts remains somewhat controversial, especially in relation to fair-value determination and the assessment of reasonable commercial purpose, and still requires professional tax judgment.
Second, trust operation and asset appreciation. Whether an offshore trust gives rise to tax during this stage depends primarily on whether the tax authorities apply the substance-over-form principle to look through the trust structure and treat the underlying offshore company held by the trust as a controlled foreign corporation (CFC). The principal legal bases are Article 8, paragraph 2 of the Individual Income Tax Law of the People’s Republic of China and Article 45 of the Enterprise Income Tax Law of the People’s Republic of China. Article 8 of the Individual Income Tax Law provides that where an enterprise controlled by a resident individual, or jointly controlled by a resident individual and a resident enterprise, is established in a country or region with an obviously low effective tax burden and, without reasonable business needs, does not distribute profits that should be attributable to the resident individual or reduces such distributions, the tax authorities have the right to make tax adjustments using reasonable methods. Where additional tax is payable, it shall be collected together with interest in accordance with law. Article 45 of the Enterprise Income Tax Law provides that where an enterprise established in a country or region where the effective tax burden is obviously lower than the rate prescribed in Article 4, paragraph 1 of that law is controlled by resident enterprises, or by resident enterprises and Chinese residents, and does not distribute profits or reduces such distributions other than for reasonable business needs, the portion of such profits attributable to the resident enterprise shall be included in the resident enterprise’s current taxable income. If the settlor retains substantive control over the trust and the trust accumulates profits through offshore companies in low-tax jurisdictions without making distributions, the tax authorities may apply CFC rules to deem the undistributed profits attributable to the settlor as distributed, thereby triggering income tax obligations. It should be noted that CFC rules apply to enterprises rather than to trusts themselves; under a trust structure, tax risk is mainly realised through a look-through analysis of the underlying companies.
Third, trust distributions or termination of the trust. When trust property is transferred to designated beneficiaries or to asset recipients upon termination, a transfer of asset ownership occurs and may give rise to tax obligations. At present, Chinese tax law has not issued special rules governing the distribution of trust income, and there remains some uncertainty over the characterization of amounts actually distributed by a trust to beneficiaries. Based on prevailing practice, if the trust distribution originates from dividends paid by underlying equity interests, it is usually subject to the 20% rate applicable to “income from interest, dividends and bonus dividends”. If it originates from capital gains arising from the disposal of trust assets, it may be subject to the 20% rate applicable to “income from transfer of property”. After receiving trust distributions, beneficiaries should proactively consult the competent tax authorities to confirm the specific treatment and reduce tax compliance risks.
If overseas assets are converted into crypto assets such as Bitcoin or Ether, can they then be used to avoid regulation? The answer is no. Crypto assets are not as opaque as some investors imagine.
Against the backdrop of tighter offshore trust scrutiny, the decentralized features of crypto assets may appear to offer investors a new source of hope. Some believe that by converting assets into Bitcoin or other crypto assets and storing them in self-custodied wallets, they can avoid CRS reporting by banks and securities brokers, hold assets overseas in secrecy and evade tax obligations.
However, the reality is different.
For individual users, fiat on- and off-ramps are the first compliance barrier that is difficult to bypass. Converting large amounts of renminbi into stablecoins or Bitcoin and transferring them overseas will almost inevitably require the use of centralized exchanges. Global mainstream exchanges such as Binance and OKX implement strict anti-money laundering (AML) and know-your-customer (KYC) policies. Users are typically required to provide identity documents, facial verification and proof of address at registration, and to explain the source of funds when making large withdrawals. Each transaction record is linked to a real identity. Even if assets are successfully moved on-chain into a wallet, the liquidation path remains exposed to regulatory scrutiny. When users need to convert crypto assets back into fiat currency for consumption or investment, whether through an exchange or an OTC broker, they must again undergo strict KYC checks and source-of-funds inquiries. Large or high-frequency fiat on- and off-ramp activity may trigger AML alerts at financial institutions, and relevant transaction information may be shared between financial intelligence units and tax authorities. Once crypto assets interact with fiat currency, their anonymity quickly disappears.
In addition, a global tax transparency framework specifically targeting crypto assets has gradually taken shape and is being implemented. The OECD has introduced the Crypto-Asset Reporting Framework (CARF) to address CRS coverage gaps in relation to crypto assets and to standardize cross-border tax information reporting for crypto-asset activities.
CARF does not regulate crypto assets themselves. Instead, it regulates entities that provide crypto-asset services. Under the framework, institutions that commercially provide the public with services involving the exchange, custody, conversion or management of relevant crypto assets may be treated as Reporting Crypto-Asset Service Providers (RCASPs) and required to report information. Typical RCASPs include centralized exchanges, custodial wallet service providers, OTC desks and brokers, issuers that provide stablecoin purchase or redemption services, and institutions that market themselves as DeFi but have an identifiable and operational entity behind them, such as a centralized front end or a yield management platform.
Under CARF, RCASPs must carry out the following work for users, including both institutional and individual users: (1) customer due diligence to identify information such as tax residence; and (2) recordkeeping and tracking of user accounts, including categorizing and compiling information on exchange, disposal, acquisition and transfer transactions involving crypto assets. These records and data must be retained for at least five years. Each year, RCASPs will report due diligence information and asset-related information to the tax authorities of their jurisdictions. The information will then be exchanged automatically among tax authorities internationally.
By the end of 2025, 75 jurisdictions had committed to implementing CARF and were set to proceed in phases. The first group of jurisdictions, mainly including the United Kingdom and EU member states, planned to conduct the first automatic exchanges of information in 2027. The second group planned full implementation in 2028, including Singapore, the United Arab Emirates and Hong Kong, China. Although mainland China has not yet committed to implementing CARF and does not provide a legal basis for crypto trading, it is still foreseeable that the transparency of information in the crypto-asset sector will increase substantially over the next two to three years. By then, the room for concealing assets and evading taxes through crypto assets will continue to narrow.
Offshore trusts and crypto assets are both facing continued intensification of global tax compliance regulation. Attempting to achieve complete tax avoidance through any single tool is increasingly unrealistic. For cross-border asset arrangements, the focus should no longer be on searching for the next hidden channel, but on adapting to the new normal of global tax transparency and building a compliance framework that can withstand scrutiny.
High-net-worth individuals should begin comprehensive tax planning and compliance health checks as early as possible, systematically reviewing their domestic and overseas assets, tax residence status and historical tax filings. Specifically, they need to organize dividends, bonuses, remuneration, gains from asset transfers and other categories of income earned in the relevant years, and compare them against prior annual individual income tax reconciliation filings to identify any omissions or under-reporting.
On this basis, investors should also reassess and optimize their wealth structures. For offshore trusts, the structure should return to its original functions of wealth succession and asset segregation. Trust terms should be carefully reviewed and revised where they reserve rights that could be regarded as substantive control, so as to ensure that the trust has a reasonable commercial purpose and independent economic substance. For crypto assets, priority should be given to platforms that are licensed or subject to clear regulation, and professional tax advisers should be consulted to reduce compliance risks.
China’s cross-border tax enforcement is likely to become more intensive, and global tax transparency is an irreversible trend. Genuine wealth security can only be achieved through compliance. It cannot be achieved by concealment; it must be supported by a robust compliance framework. Against the broader backdrop of global tax transparency, offshore trusts will inevitably become more transparent and more compliance-oriented. Similarly, crypto assets are not a legal vacuum. The wave of transparency-based regulation is already approaching. For every investor seeking to preserve and transfer wealth securely in an era of globalization, making compliance the core principle of asset allocation and structural design is the more reliable path across market cycles.
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