CRS Is Only the Starting Point: What CFC Rules, Offshore Trusts and Notices 21 and 15 Actually Change

First level: CRS is responsible for exchanging information and is not responsible for creating taxes.

In 2017, China issued the "Management Measures for Due Diligence of Tax-Related Information on Non-resident Financial Accounts", which requires financial institutions to identify the tax resident status of account holders and relevant controlling persons, and collect and submit non-resident financial account information. The trustor, trustee, beneficiary and other persons who exercise ultimate effective control of the trust may also fall within the scope of identification of "controlling persons".

Hong Kong’s AEOI mechanism also requires reporting financial institutions to conduct due diligence and submit information to the Inland Revenue Department for exchange with relevant tax jurisdictions. The exchange itself does not mean that taxes are owed; what it changes is the data asymmetry, making it easier for tax authorities to compare accounts, controlling persons, tax residents and returns with each other.

Second level: CFC handles anti-deferral of profits of low-tax offshore companies

The core of Article 8 of the "Personal Income Tax Law of the People's Republic of China" is not that "offshore companies are CFCs", but that if Chinese residents control enterprises established in countries (regions) with significantly lower actual tax burdens and do not distribute or under-distribute profits without reasonable operating needs, the tax authorities can make tax adjustments.

Therefore, the actual judgment depends on tax residency, control, actual local tax burden, whether profits are distributed, and whether undistributed profits have real operating needs. The CRS may provide clues to accounts and controlling persons, but does not automatically complete the CFC's legal judgment.

The third level: Announcement No. 21 makes the "what is taxable" about offshore trusts more specific

Announcement No. 21 of 2026 includes trusts established in accordance with overseas laws and legal arrangements with similar trust functions, and sets personal income tax treatment for settling assets into a trust, income during the trust term, income distribution, termination and inheritance, etc. When a resident individual loads property into an offshore trust, he or she should declare the balance as "income from property transfer" based on the market value at the time of loading, after deducting the original value of the property and reasonable expenses.

The announcement goes beyond whether the cash is officially distributed. The provision of loans, guarantees, payment of personal expenses, free or low-cost use of property and other benefits to resident individuals and related parties by an offshore trust or an offshore enterprise controlled by it may be deemed to be a distribution. This makes "no money transferred to personal account" no longer a sufficient answer.

The announcement further stipulates that income generated by resident individual offshore trusts and specific overseas entities held, controlled, and managed by them during their existence, regardless of whether they are actually distributed or not, may be required to be reported annually by the resident individual. The judgments listed in the announcement include: whether passive income accounts for more than 50% of the total profit of the previous year, whether it has substantial operating conditions, whether non-operating expenses are paid for individuals, and whether production and operation decisions are actually made by the organization; control also includes directly or indirectly holding more than 25% of the equity, or constituting substantial control in terms of funds, operations, purchases and sales, distribution, etc. There are express exceptions for licensed financial institutions that are regulated and bear risks independently for unspecified customers, as well as organizations that can demonstrate reasonable business purposes and substantive operations. These are the offshore trust rules of Announcement 21 itself and should not be confused with the pre-existing CFC provisions of Article 8 of the Personal Income Tax Law as the same regime.

Level 4: Announcement No. 15 answers "To whom, when, and what must be filed?"

Announcement No. 15 is a collection and administration document. Income from the transfer of loaded property by resident individuals should be reported from March 1 to June 30 of the following year; resident individuals should also declare the offshore trust income of the previous year during the same period each year. The first declaration must also be accompanied by information such as a trust agreement, details of the included property, and organizational structure.

Termination of trust, change of resident status, death of the creator and trust inheritance all have specific reporting time points. The trustee needs to account for income and distribution, and assist taxpayers in submitting information; foreign language information should also be translated into Chinese. For trusts that have been loaded with property before the announcement, the initial declaration must also provide information such as the year of establishment, the 2025 annual report, and financial statements for previous years.

In terms of time, you can’t just look at the next annual filing period. Announcement No. 21 will be implemented from the date of issuance on July 24, 2026, and stipulates that the loaded property and income during the trust term from January 1, 2026 will be treated in accordance with the new announcement; some unpaid taxes on the loaded property from 2023 to 2025, as well as related income generated in the duration before 2026, have a transitional arrangement in which they must be declared within 90 days from the implementation of the announcement without late payment fees. Whether it falls within the transitional scope must still be determined based on the resident status, date and historical records of the case.

Three judgments that are easily overlooked

First, the trust’s legal ownership, tax attribution and CRS controlling person identification may not be exactly the same. Second, the absence of a distribution does not necessarily have no current tax consequences. Third, existing trusts not only need to modify future procedures, but may also need to review property costs, historical income, distributions and beneficial use records.

The high impact scope of these announcements is not just new trusts, but structures that cannot be reconciled between residency status, trust documents, offshore companies, bank accounts and actual benefits.

G70 point of view: First do the reconciliation of "Identity - Control - Assets - Benefits - Filing"

We do not recommend asking “Is there any use for offshore trusts?” first. A more precise question is: Who is the tax resident? Who has legal and practical control? When was the property loaded and at what value? Who receives cash or non-cash benefits? Which jurisdiction requires reporting?

For families, this is a joint project of legal, tax, fiduciary and financial records, not just a CRS form filled out by the bank.

Important note

This article is for general information and educational purposes and does not constitute tax or legal advice in Mainland China, Hong Kong or other jurisdictions. The specific treatment depends on the individual's tax residency, trust terms, control facts, property sources and historical records, and should be reviewed by qualified professionals on a case-by-case basis.