China’s high net worth individual (HNWI) population has significantly increased in the past decade, making family trusts an increasingly important tool for wealth management and succession planning. Despite the increasing need for family trusts, in practice, China has not introduced specific legislation to deal with them, even though the Trust Law has been in place for more than 20 years. As a result, there is uncertainty about the taxation of trusts.
Based on data published by the China Trust Registration, in 2020, the volume of assets held under family trusts experienced an annual increase of 80.29%. As of June 2020, there were 9,049 onshore family trusts with total assets amounting to RMB186 billion (USD28.7 billion).
In September 2018, the Trust Supervision and Administrative Department of the China Banking and Insurance Regulatory Commission (CBIRC trust department) issued Xin Tuo Han  No. 37 (circular 37) which, for the first time, defines the meaning of “family trust” from a regulatory perspective. Under circular 37, a “family trust” is defined as a trust business where:
(1) a trust company accepts the entrustment of a single person or family to provide customised affairs management and financial services;
(2) the amount or value of the family trust property is at least RMB10 million; and
(3) the beneficiaries are family members, which could include the settlor, provided that the settlor is not the only beneficiary. No further rules dealing with family trusts have been issued since then.
In addition to the lack of specific legislation dealing with family trusts, another issue is that China does not have clear rules on the taxation of trusts overall, let alone family trusts. For example, it is not even clear whether an asset transfer from the settlor to the trustee upon the establishment of a trust would give rise to taxes.
These uncertainties create impediments to the use of family trusts in China. Many people – including industry practitioners, professionals and academics – have therefore been advocating the improvement of family trust legislation.
In the recent annual session of the National People’s Congress (NPC) and the Chinese People’s Political Consultative Conference (CPPCC), in March 2021, several congress and conference representatives – including the head of the CBIRC trust department, Lai Xiufu, and the former chair of the China Securities Regulatory Commission (CSRC), Xiao Gang – proposed that the family trust legislation be reformed.
Their key proposals are as follows:
. First, the trust law should be amended and practical interpretation guidance should be issued to refine the rules concerning the transfer of trust property, the duties of the trustee, and beneficiaries’ rights.
. Second, the ownership of trust property should be clarified and a trust property registration system should be established, which will also serve as the foundation of the taxation regime for trusts.
. Third, in response to the major difficulty of tax collection for family trusts, a comprehensive taxation regime for trusts should be developed to ascertain the tax treatment for the transfer and distribution of trust property, and for the set-up and termination of a family trust.
That said, the proposed reform to family trust legislation was not included in the NPC Standing Committee’s Legislative Plan for 2021, nor is there any official news indicating that the State Tax Administration has any concrete plans for issuing rules on the taxation of trusts. It is expected that PRC onshore family trusts will need to live with existing legislative and taxation uncertainties, for now.
Business Law Digest is compiled with the assistance of Baker McKenzie. Readers should not act on this information without seeking professional legal advice. You can contact Baker McKenzie by e-mailing Howard Wu (Shanghai) at firstname.lastname@example.org