As China trust-tax deadline looms, wealthy clients explore options across Asia

[SINGAPORE] One month after China tightened its tax rules on offshore trusts, wealthy Chinese are racing to assess their tax exposure and rethink cross-border structures, sending ripples across Singapore and the region’s wealth management industry ahead of an October deadline.

Lawyers and wealth advisers said clients are grappling with not only how to value assets and raise cash to settle their tax bills, but also what options they have for structuring their offshore wealth over the longer term.

“Most clients underestimate the scope… You are looking at asset schedules, distribution histories, beneficiary details and more,” said Windson Li, co-head of tax for Asia at DLA Piper, noting that the firm has been busy on this front, with the work “a mix of everything”.

Loh Kia Meng, head of private wealth and family office practices at law firm Dentons Rodyk, has seen dozens of client inquiries since the announcement, with existing offshore trust holders facing the most-immediate pressure to work out what they owe and prepare their filings.

“The prevailing sense I get from the Chinese advisers and clients is ‘declare the trust first’,” he said, adding that clients are prioritising meeting the deadline first to avoid penalties before working with tax authorities to sort out documentation and figures.

Meanwhile, Tim Searle, adviser at HNWTax, a private boutique firm specialising in international tax mitigation, said he observed that families have been “slow to act”.

He pointed to unfamiliarity with the rules, limited exploration of options beyond Asia and a general reticence to discuss tax matters openly as reasons for this.

On Jul 24, China’s Ministry of Finance and the State Taxation Administration issued new rules governing the individual income tax treatment of offshore trusts.

Among the provisions is a 90-day window for taxpayers to voluntarily declare and settle certain unpaid tax liabilities relating to existing offshore trusts without late-payment surcharges. The window closes on Oct 22.

The rules also set out the tax treatment when assets are transferred into offshore trusts, as well as for income generated by the trusts. They additionally cover the related reporting and documentation requirements.

Industry observers broadly view China as bringing its taxation of offshore trusts closer to mature tax regimes in the West, which already have rules governing how residents are taxed on foreign trusts.

Race to beat the deadline

Loh noted that a month in, the market has largely moved past questioning whether the rules apply, and on to the mechanics: what must be reported, how assets should be valued, how much tax is owed and where the liquidity to pay it will come from.

He divides clients into three groups: those with existing offshore trusts, those establishing a trust but have yet to transfer assets, and those merely considering one.

The first group faces the most pressing challenge to determine exposure, while the latter two are pausing to scrutinise valuations and potential tax consequences before proceeding.

For the first group, the “most urgent work involves reviewing existing structures, identifying the assets and transactions that may need to be reported, establishing historical values and preparing for filing”, said Loh, adding that Dentons Rodyk is working with tax accountants and lawyers on calculations and filings.

DLA Piper’s Li noted that there is also a whole category of work, such as a compliance health check, to assess and then flag if that has not been properly reported.

“That piece tends to be the most sensitive, but also the most important,” he said.

Valuation is also proving especially difficult for harder-to-price assets, said Loh, adding that while liquid assets and real assets are straightforward to value, pre-initial public offering shares, preferred listed shares with moratorium periods and deferred option periods are harder.

He also cautioned against unwinding the trust, saying that it may not make the tax issue disappear and could itself trigger further tax consequences.

Likewise, Li said clients need to be realistic about the downside of inaction, which could include potential back taxes, surcharges and, in serious cases, penalties, late-payment interest – or in a very extreme case, criminal referral.

He noted that the 90 days is essentially a grace period to come forward, clean up historical tax issues and get things right on relatively favourable terms.

“Once that window closes, the calculus changes dramatically – voluntary disclosure after the fact carries far less goodwill,” he added.

Relocation an option?

Armand Arton, CEO of Arton Capital, a global citizenship financial advisory firm, said some Chinese tax residents are exploring relocation as an option in response to the changes, with Singapore, Italy and Greece among the destinations drawing interest.

“We have seen inquiries relating to Singapore residency and family-office routes double since the announcement,” he said.

He added, however, that this has not yet translated into a corresponding increase in applications, as families take time to consider.

Mainland China clients make up around 40 per cent of the wealthy clients Arton works with, who have an average net worth of US$30 million.

Teodor Nenkov, a tax research analyst from global citizenship and mobility firm Nomad Capitalist, has also observed a rising interest in second residencies and passports. He cited Singapore’s preferential tax regime and lifestyle appeal as a possible draw for some wealthy Chinese.

Still, Arton noted that internationally mobile families can no longer assume that offshore trusts automatically shield their assets from taxation, as Chinese tax authorities align with the West in taking a “substance-over-form” approach.

He cautioned that establishing residency typically takes at least three to six months, which is unlikely to beat the upcoming filing deadline.

Foreign residency and citizenship programmes are also not currently subject to full disclosure in China – but he expects scrutiny to increase over time.

“I think more regulation will come, as the government becomes more sophisticated in those tools,” he said.

Other solutions?

Loh said that the law firm has yet to see a clear shift from trusts towards structures such as variable capital companies or insurance products, although some clients are reconsidering the practice of “putting every asset into the same basket”.

“Changing the wrapper does not necessarily change the tax result. Clients first need to understand who owns or controls the structure, where the income arises and whose tax residence matters,” he said.

For clients mulling over structures or jurisdictions that may fall outside existing reporting requirements, Arton was blunt about the risk here: With the spread of artificial intelligence-assisted asset tracking, this is “very risky” territory.

Governments – including China – are getting materially better at tracing assets across borders, especially with the use of AI now, he said.

In the longer term, observers expect wealthy Chinese clients to take three to five years to fully adjust to the changes as they reassess how their offshore wealth is structured and managed.

Loh said that his team is advising clients on potential restructuring and longer-term portfolio planning, although those issues are generally taking a backseat to the more immediate task of meeting compliance requirements.

Li described the upcoming deadline as not the finish line, but more like the starting gun for a new compliance regime.

“Clients should already be thinking about how they will manage their offshore trusts going forward: annual reporting, potential withholding obligations, and whether their current set-up still makes sense from a tax and succession planning standpoint,” he added.