Written by: FinTax

1 Event: Tax Authorities in Multiple Regions Strengthen Tax Collection on Offshore Trusts

Recently, discussions around the topic of reporting overseas income by Chinese tax residents have continued to attract attention. According to reports from several foreign media outlets, tax authorities in regions such as Jiangsu and Shenzhen are ramping up inspection efforts, taxing offshore trusts that hold shares in certain Hong Kong-listed companies, and requiring the holders of these trusts to report detailed financial information including dividend income and investment gains from stock sales. In some cases, local tax authorities have also sought to impose a 20% tax on these trusts' investment gains along with additional penalties.

Domestic media outlet Economic Observer also confirmed in related reports that several executives of Hong Kong-listed companies received calls from tax authorities in economically developed coastal regions. They were asked to report detailed financial information about their offshore trusts established overseas, including dividend income from overseas assets, and investment gains from trading Hong Kong-listed stocks. The report also pointed out that actions regarding the reporting of overseas asset income have been initiated by relevant departments. In early 2025, Shanghai started special audits requiring relevant parties to report the movement of their overseas assets over the past 2-3 years, including details of Hong Kong stock dividends and equity transfer profits. Against the backdrop of sluggish economic growth and expanding budget deficits, China has been seeking broader tax revenue sources. Relevant departments have intensified efforts to tax the large amounts of undeclared overseas assets held by residents, and two years ago, after targeting super-rich individuals, expanded the scope of scrutiny to include the middle-income group.

2 The End of the "Tax Evasion Era" for Offshore Trusts

An offshore trust is a trust structure established by a grantor overseas that entrusts personal or family wealth to an offshore trustee, better achieving goals such as wealth inheritance, asset risk isolation, and tax planning. Offshore trusts can be set up in offshore financial hubs like the Cayman Islands and British Virgin Islands, infusing overseas assets like stocks of Hong Kong and U.S. listed companies to isolate asset risks and plan for wealth transfer, while also benefiting from the tax exemption policies for personal income tax, corporate income tax, and capital gains tax provided by offshore financial centers, thereby achieving tax evasion. The core logic lies in utilizing the information barriers and tax discrepancies between different jurisdictions.

Mainland Chinese enterprises seeking to list in Hong Kong or the U.S. are often constrained by foreign investment access restrictions and usually register holding companies in the Cayman Islands as the listing entity, subsequently controlling domestic operating entities holding business licenses through Hong Kong subsidiaries and wholly foreign-owned enterprises (WFOEs), commonly known as red-chip or VIE structures. Companies such as Alibaba, Baidu, and JD.com have all gone public offshore through this method.

With the widespread implementation of the OECD's Common Reporting Standard (CRS), the space for hiding taxes by relying on information asymmetries has significantly narrowed. Major offshore financial centers including the Cayman Islands, BVI, Hong Kong, and Singapore have implemented CRS, allowing for the automatic exchange of non-resident financial account information with Chinese tax authorities. A series of regulatory actions have compressed the gray area for hiding assets and deferring taxes using trusts set up abroad.

Taking Hong Kong as an example, under the CRS standard, financial institutions must comply with due diligence procedures under the Inland Revenue Ordinance (Chapter 112) to identify the financial accounts held by taxpayers in the reporting jurisdiction (referring to individuals who are tax residents and have tax obligations due to their residency status) or accounts held by non-financial entities that are passive and controlled by individuals or entities that are tax residents in the reporting jurisdiction. They must also comply with the user guide issued by the tax office for the Hong Kong Financial Account Information Report Data Structure, collecting and submitting the necessary information on such accounts to the tax office each year. According to the user guide, if a passive non-financial entity has multiple controlling individuals who are 'reporting persons,' all such 'reporting persons' must be reported. The identity information of grantors, trustees, protectors, beneficiaries, and other relevant parties associated with offshore trusts established by mainland tax residents, as well as the year-end balance of trust accounts, annual dividends, and interest income, may be periodically transmitted to mainland tax authorities. Based on the vast amount of data returned from CRS exchanges, utilizing the big data comparison capabilities of the Golden Tax System, tax authorities can accurately identify the ultimate beneficiaries and actual controllers of offshore trusts, making preliminary judgments on the overall scale and income situation of overseas assets.

Specifically, offshore trusts involve three stages of taxation.

The first stage: Establishing the trust and placing assets into it. In the process of placing assets into the trust, a transfer of ownership occurs, which may trigger corresponding tax obligations. The deposit of cash assets generally does not involve personal income taxes. However, regarding the placement of non-monetary assets such as equity and real estate, special attention is warranted. According to the notice on personal income tax policy related to non-monetary asset investments, personal investments in non-monetary assets are deemed as personal transfers of non-monetary assets and investment occurring simultaneously, with the income from personal transfers of non-monetary assets subject to personal income tax calculated under 'capital gains,' with a tax rate of twenty percent. The placing of real estate may also involve value-added tax and deed tax, among others. However, there is some controversy in practice regarding the tax treatment of non-monetary asset deposits into trusts, particularly concerning the determination of fair value and the assessment of reasonable commercial purpose, which require professional tax judgment.

The second stage: Trust operation and asset appreciation. Whether offshore trusts incur taxes at this stage depends on whether tax authorities apply the principle of substance over form to penetrate the trust structure and classify the underlying offshore companies held by the trust as Controlled Foreign Corporations (CFCs). The main legal basis for this judgment is Article 8, Paragraph 2 of the Individual Income Tax Law of the People's Republic of China and Article 45 of the Corporate Income Tax Law of the People's Republic of China. Article 8 of the Individual Income Tax Law states that businesses established in countries (regions) with significantly low effective tax burdens that are controlled by resident individuals or jointly controlled by resident individuals and resident enterprises without reasonable business needs shall not distribute or decrease the distribution of profits attributable to resident individuals; tax authorities have the right to make tax adjustments reasonably, and overdue taxes should be collected along with interest. Article 45 of the Corporate Income Tax Law stipulates that entities established in countries (regions) with effective tax burdens significantly lower than the tax rate specified in Article 4, Paragraph 1 of this Law, and not distributing or reducing the distribution of profits due to reasonable business needs, the profits attributable to the resident enterprises shall be included in the current revenues of the resident enterprises. If the grantor retains substantial control over the trust, and the trust accumulates profits through its offshore companies in low-tax jurisdictions without distribution, tax authorities may treat undistributed profits attributable to the grantor as distributed under CFC rules, thus triggering income tax obligations. It should be noted that CFC rules target enterprises rather than trusts themselves; the tax risks under a trust structure are primarily realized by penetrating the underlying companies.

The third stage: Trust distribution or termination. When trust property is transferred to designated beneficiaries or an asset recipient upon termination, a transfer of ownership occurs, which may generate tax obligations. Currently, Chinese tax law has not issued specific provisions on the distribution of trust income; the nature of funds received by beneficiaries from trust distributions remains somewhat uncertain. According to the prevailing handling standards in practice, if the trust distribution originates from underlying equity dividends, it typically applies a tax rate of twenty percent under 'interest, dividends, and bonus income'; if it originates from capital gains resulting from the trust disposing of assets, it may apply a tax rate of twenty percent under 'capital gains.' Beneficiaries should actively consult with the competent tax authorities after receiving trust distributions to confirm specific handling methods to reduce tax compliance risks.

3 Beyond Offshore Trusts: Can Cryptocurrencies Become a "Tax Haven"?

So, can converting overseas assets into cryptocurrencies like Bitcoin or Ethereum cleverly circumvent regulations? The answer is no; cryptocurrencies are not as completely opaque as people imagine. In the context of strengthened regulations on offshore trusts, the decentralized characteristics of cryptocurrencies seem to offer investors a sliver of new hope. Some people believe that exchanging assets into cryptocurrencies like Bitcoin and storing them in non-custodial wallets they control can avoid CRS information reporting for bank accounts and brokerage accounts, thus secretly holding assets overseas and escaping tax obligations.

However, the reality is not so. For individual users, the processes of depositing and withdrawing funds pose the first insurmountable compliance hurdle. Converting large amounts of RMB into stablecoins or Bitcoin and transferring them abroad almost invariably requires going through centralized exchanges; major global exchanges like Binance and OKX enforce very strict anti-money laundering and KYC policies: users must provide identification, facial recognition, and proof of address during registration, and for large withdrawals, funds must be sourced. Every transaction record corresponds to a real identity. Even if funds are successfully sent on-chain and transferred to a wallet, their cash-out routes remain subject to regulation. When users need to convert cryptocurrencies back into fiat for consumption or investment, whether through exchanges or over-the-counter brokers, they must undergo strict KYC reviews and inquiries about the source of funds. High-frequency deposit and withdrawal activities can trigger anti-money laundering alerts at financial institutions, and related transaction information may be shared with tax authorities via financial intelligence agencies. Once cryptocurrencies interact with fiat, their anonymity quickly disappears.

In addition, a global framework for tax information transparency regarding cryptocurrencies is also gradually taking shape: the OECD has launched CARF, aimed at addressing the shortcomings of CRS in covering cryptocurrencies and regulating cross-border tax information disclosure related to cryptocurrencies. CARF does not regulate cryptocurrencies themselves but rather the entities that provide cryptocurrency services. Under its framework, any organization offering commercial services for transferring cryptocurrencies to the public, such as trading, custody, exchange, and management, may be considered a Reporting Crypto-Asset Service Provider (RCASP) and must assume reporting obligations. Typical RCASPs include centralized exchanges, custodial wallet service providers, OTC and brokers, issuers offering services for buying or redeeming stablecoins, and those operating under the DeFi name but having identifiable operating entities (such as centralized front-ends and yield management platforms).

According to the CARF framework, RCASPs must carry out the following tasks for users (including institutional and individual users): (1) Customer due diligence to identify their tax residency status; (2) Record and track user accounts, categorizing transaction information related to the exchange, disposal, acquisition, and transfer of cryptocurrencies, with records and data required to be kept for at least five years. Each year, RCASPs will report the due diligence information and asset information to the tax authorities in their jurisdiction. Subsequently, international information exchanges will be conducted automatically between tax authorities.

By the end of 2025, 75 countries and regions have committed to implementing CARF, and the system will be promoted in batches. The first batch of jurisdictions plans to initiate the first automatic information exchange in 2027, including the UK and EU member states; the second batch of jurisdictions plans to fully implement in 2028, including Singapore, the UAE, and Hong Kong, China. Although mainland China has not yet committed to implementing CARF and lacks a legal basis for cryptocurrency trading, it can still be anticipated that the information transparency in the cryptocurrency field will greatly increase in the next two to three years. By then, the space for hiding assets and evading taxes through cryptocurrencies will continue to be squeezed.

4 Conclusion: Tax Compliance is the Cornerstone of Wealth Security

Offshore trusts, cryptocurrencies, and other financial instruments are facing increasing global tax compliance regulations. Attempting to use any tool to achieve complete tax evasion has become an unrealistic fantasy. The focus for investors in cross-border asset arrangements should no longer be on finding the next covert method but rather on adapting to the new normal of global tax transparency and proactively constructing compliant frameworks that can withstand scrutiny.

High-net-worth individuals should promptly initiate comprehensive tax planning and health self-checks, systematically reviewing their domestic and overseas assets, tax residency status, and historical tax payment records. Specifically, they need to organize different types of income such as dividends, labor remuneration, and capital gains obtained in corresponding years, and compare them against historical personal income tax annual settlement declaration records, confirming whether there are any undeclared or underreported situations.

On this basis, a broad range of investors should also re-evaluate and optimize their wealth structures. For offshore trusts, these should return to the essence of wealth inheritance and asset isolation, critically examining and modifying provisions in the trust terms that may be considered rights retention arrangements representing substantial control, ensuring the trust structure possesses reasonable commercial purposes and independent economic substance. For cryptocurrencies, priority should be given to choosing licensed or clearly regulated trading platforms and consulting professional tax institutions to mitigate compliance risks.

China's cross-border tax enforcement will further intensify, and the trend of global tax transparency is irreversible. Only compliance can achieve true wealth security. Against the backdrop of global tax transparency, offshore trusts will inevitably move toward greater transparency and compliance. Similarly, cryptocurrencies are not a legal vacuum, and the wave of transparency regulation is coming. For every investor seeking to safeguard and inherit wealth in the era of globalization, making compliance the core principle of all asset allocation and structure design is the reliable path to navigate cycles and ensure long-term stability.

免责声明：本文章仅代表作者个人观点，不代表本平台的立场和观点。本文章仅供信息分享，不构成对任何人的任何投资建议。用户与作者之间的任何争议，与本平台无关。如网页中刊载的文章或图片涉及侵权，请提供相关的权利证明和身份证明发送邮件到support@aicoin.com，本平台相关工作人员将会进行核查。