China eases uncertainty over offshore trust taxes before grace period ends

China’s tax authorities are accepting reasonable explanations when enforcing new rules on offshore trust gains, according to an executive who says their appeal was successful, offering some reassurance as a 90-day grace period expires on Thursday.

The approach appears to be translating into greater clarity from regulators. Earlier this week, the State Taxation Administration published a question-and-answer series that suggested Beijing was implementing the rules in line with international practice.

“We successfully defended ourselves,” said a person familiar with the matter at a Hong Kong-listed mainland Chinese company, who asked not to be identified because the issue was sensitive.

About a month before the latest clarification was issued, the company was asked to pay tax related to an offshore trust for a non-Chinese executive. It appealed on the grounds that the vehicle was a stock incentive trust set up in 2021 before the company’s initial public offering (IPO), said the source.

The offshore trust was estimated to hold around US$50 million worth of equity when it was established, based on the company’s pre-IPO valuation.

Stock options are commonly granted to executives at overseas companies as part of their compensation, particularly in the tech sector.

Many mainland Chinese clients regarded the 20 per cent levy on offshore trusts as “unreasonable”, according to a tax adviser who said they had seen demand for solutions rise after Beijing’s tax announcement.

On Monday, the State Taxation Administration reminded taxpayers to review their offshore trust arrangements before the grace period expired.

“To avoid late payment penalties and other related risks, they must file taxes and make payments in accordance with the law within the transition period,” it said.

It clarified on the same day that company-established offshore stock incentive trusts were essentially compensation arrangements and would not be subject to the 20 per cent tax.

Instead, personal income tax would apply when employees exercised stock options or received gains from dividend distributions and share transfers, it added.

The tax agency also addressed five other frequently asked questions, including the treatment of offshore trust losses, interest payments, trust management fees, and transfers involving related parties.

There are, however, still many unanswered questions.

The clarification by the State Taxation Administration was only “a partial victory”, the source at the Hong Kong-listed company said. “Next, we need to see whether the local tax authorities would adopt the adjustment.”

This year, China has tightened oversight of cross-border gains earned by mainland Chinese residents and beneficiaries through offshore trusts and investments amid mounting fiscal pressure.

Local tax authorities in Beijing and Hangzhou in eastern China’s Fujian province were reported in August to have levied taxes on dividends and interest income from overseas insurance policies.