Determining Taxable Residents in the PRC and Taxation on Worldwide Income

First of all, for any individual that is determined as a PRC “taxable resident”, they are liable to pay individual income tax on their worldwide income, of which, any income derived overseas shall be declared and taxed between March 1 and June 30 of the subsequent year. On the other hand, in the case where an individual is not recognised as a “taxable resident” – ie, a “non-resident individual”, they are only required to pay individual income tax on income derived within China.

According to China’s current tax law, as long as the individual either “has a domicile in China” or “has resided in China for a total of 183 days in a tax year”, they can be identified as a “taxable resident”. Please note that non-Chinese nationals can also be taxable residents.

A “domicile in China” does not necessarily mean possession of a real estate in China but refers to a habitual residence in China. For individuals residing in China for reasons such as studying, working, visiting relatives, or tourism, but who intend to return to their home country once those reasons cease to exist, their habitual residence is not considered to be within China.

Recent Reforms on the Method of Collection and the Structure of Tax Rates

Comprehensive income

The biggest change in the Individual Income Tax Law is the adoption of the concept of “comprehensive income”, which combines salaries and wages, remuneration for personal services, author’s remuneration, and royalties, so as to apply an extra progressive tax rate of 3% to 45%.

Excess progressive tax rate of comprehensive income:

• for the portion below CNY36,000, 3%;
• for the portion exceeding CNY36,000, 10%;
• for the portion exceeding CNY144,000, 20%;
• for the portion exceeding CNY300,000, 25%;
• for the portion exceeding CNY420,000, 30%;
• for the portion exceeding CNY660,000, 35%; and
• for the portion over CNY960,000, 45%.

Income from business operations

This includes the following.

• Income derived from production and business activities of individual industrial and commercial households, including income earned by individuals as sole proprietors or individual partners of partnerships registered within the country.
• Income obtained by individuals who, in accordance with the law, engage in educational, medical, consulting, and other paid service activities.
• Income obtained by individuals through contracting, leasing, subcontracting, or subleasing operations with enterprises or institutions.
• Income obtained by individuals from other production and business activities.

Excess progressive tax rate of income from business operations:

• for the portion below CNY30,000, 5%;
• for the portion exceeding CNY30,000, 10%;
• for the portion exceeding CNY90,000, 20%;
• for the portion exceeding CNY300,000, 30%; and
• for the portion over CNY500,000, 35%.

Other income

This includes income from interest, dividends, bonuses, lease of property, transfer of property and incidental income. For high net worth individuals, these are the main sources of income. Among them, incidental income, for example, includes lottery wins. 

Please note that although the recipient of a house as a gift is subject to incidental income tax at a rate of 20%, no individual income tax will be levied on both parties when the following three situations apply:

• the recipient is the spouse, parent, child, grandparent, grandchild, sibling of the transferer;
• the recipient is the caregiver or supporter of the transferer; or
• the recipient is the legal heir, testamentary heir or legatee who has obtained the property right of the house in accordance with the law.

China currently has no estate, inheritance, gift or similar transfer tax. Incentives and exemptions for individual income tax are as follows.

Special Additional Deduction for Individual Income Tax

This includes children’s education, continuing education, serious illness medical treatment, housing loan interest, housing rent, support for the elderly, and care for infants under three years old. This is to reduce the burden of family maintenance and to improve people’s livelihood.

For example:

• care for children under three years old – for children under three years of age, expenses incurred during their care period are eligible for a standard deduction of CNY2,000 per child per month;
• education for children – once children reach three years of age and enter either preschool education or full-time academic education, there is a standard deduction of CNY2,000 per child per month; and
• housing loan interest – for the interest paid on the first home mortgage, taxpayers can deduct a fixed amount of CNY1,000 per month. The deduction period can last up to 240 months.

Exemptions for Individual Income Tax

For high net worth individuals, it is more common to exempt insurance payouts. The insurance indemnity received is allowed to be deducted before calculating the income tax.

Recently, China has paid more attention to tax regulations, and transactions between related parties, large transactions between individuals and enterprises have been under stricter supervision, which means room for tax planning in China is relatively narrow.

In practice, some high-income earners will reduce their taxable amount by changing the tax items, such as transforming the individual income tax into the enterprise income tax. However, these “plannings” are generally considered illegal, and may result in criminal penalties.

Additionally, insurance compensation for personal losses due to accidents is not subject to individual income tax in China. Purchasing eligible insurance policies can provide tax benefits. Individuals who purchase tax-advantaged health insurance products can deduct up to CNY2,400 per year from their taxable income, as per the notice issued by the Ministry of Finance, the State Taxation Administration and the (revoked) China Insurance Regulatory Commission in the year of 2017.

Currently, China does not have a nationwide real estate tax in place, nor does it have specific tax policies targeting non-citizens purchasing real estate. However, in January 2011, both Shanghai and Chongqing initiated programmes to levy real estate taxes on individual residential properties. Taking Shanghai as an example, the taxable subjects include newly purchased second homes and additional properties owned by local resident households, as well as newly purchased homes acquired by non-local resident households.

Since 2021, there have been continuous discussions regarding real estate tax in China. In April 2023, China achieved comprehensive real estate registration, which helped promote nationwide housing information networking, thereby eliminating major technical barriers to the full implementation of a real estate tax system. However, despite these advancements, the legislative plan released in August 2023 by the Standing Committee of the 14th National People’s Congress did not include the highly anticipated real estate tax legislation.

According to the decision of the National People’s Congress Standing Committee in 2021 authorising the State Council to pilot real estate tax reforms in selected areas, the pilot programme lasts for five years. As this year is the fourth year of the pilot programme, it is likely to continue for another year. Scholars predict that the path to real estate tax reform will involve gaining experience and designing effective strategies based on these programmes before advancing to a national legal framework to support orderly implementation across the country.

On the legislative front, the development of tax laws in China has been relatively stable. Following the revision of the Individual Income Tax Law in 2018, subsequent laws such as the Real Estate Tax Law, the Deed Tax Law, and the Stamp Tax Law have been successively enacted. As of the date of writing, with the introduction of the Value-Added Tax Law, laws have been enacted for 14 of the 18 current tax types. At the same time, the revision of the Tax Collection and Administration Law, as the highest-level procedural law in China’s tax legal system, is also being accelerated. The revised draft was released for comment on 28 March 2025 via the websites of the State Taxation Administration and the Ministry of Finance.

However, on the enforcement side, there remains room for improvement in the practical stability of Chinese tax laws due to the lack of sufficient and timely implementation rules and regulations.

In 2013, the “Notice of the State Council Office on Deepening the Division of Key Tasks in Reforming the Income Distribution System” mentioned plans to reform and improve property taxes and to consider introducing inheritance taxes at an appropriate time. However, despite increasing discussions over the years, the progress on property taxes in China remains relatively stable (see 1.4 Taxation of Real Estate Owned by Non-Residents), and inheritance taxes have not yet been put on the agenda. For high net worth individuals, the focus remains on the Individual Income Tax as a key concern.

The Chinese government has been committed to enhancing the transparency and compliance of tax laws to address abuses or loopholes.

As early as November 2016, the State Administration of Taxation and the State Administration of Foreign Exchange entered into the “MOU on Promoting Information Sharing and Implementing Joint Supervision Cooperation”. The signing of this memorandum laid the groundwork for the application of tax-related financial account information obtained through CRS exchanges in combating illegal activities such as illegal transfer of foreign exchange funds and evasion of foreign exchange controls by the State Administration of Foreign Exchange.

In September 2018, the State Administration of Taxation conducted the first automatic exchange of tax-related financial account information across borders with other countries (regions) under CRS.

Additionally, China reached a preliminary agreement with the United States in 2014 to implement the Foreign Account Tax Compliant Act (FATCA), requiring the exchange of financial account information between the two countries. This has led to increased transparency of Chinese individuals’ overseas financial assets and a significant rise in tax burdens. Some individuals have chosen to relinquish their US citizenship to avoid high tax liabilities.

Traditional Chinese culture places great importance on family and the continuity of the family lineage. Regardless of the size of the family, the older generation tends to transfer wealth to the next generation. For instance, in China, immediate family members such as children and spouses usually enjoy more right of succession, while non-immediate family members like siblings have less rights and are listed as secondary in the order of statutory inheritance.

Moreover, Chinese traditional culture emphasises filial piety and gratitude towards those who raised and supported individuals. Inheritance laws take this into account by allowing appropriate inheritance to individuals who relied on or supported the deceased, even if they are not direct heirs.

Additionally, widowed daughters-in-law are given priority in inheriting from their in-laws, and widowed sons-in-law are given priority in inheriting from their parents-in-law, provided that they have fulfilled significant care-giving duties.

It is increasingly common for Chinese individuals to purchase properties or settle overseas, acquiring foreign citizenship in the process. Consequently, this has brought significant attention from high net worth families to cross-border inheritance involving Chinese territories or citizens. Challenges of cross-border inheritance involving China can be categorised as follows.

Part of the provisions regarding the conflict of laws in China concerning succession are as follows.

• For legal successions, the laws of the regular residence of the ancestors when deceased shall apply. However, for the legal inheritance of immovable assets, the laws in which the immovable assets are located shall apply.
• For the format of wills, the laws of the testator’s regular residence when drawing up the wills or the place of decease, the nationality laws or the laws of the place in which the wills are conducted shall apply and such wills shall be valid.

Due to the involvement of multiple jurisdictions and laws from different countries, and the fact that not all situations clearly indicate which law should be applied, choosing a more convenient or advantageous approach for one’s own interests during inheritance without further specifying the applicable law in the will or relevant agreements may create complications in cross-border inheritance.

Legal Differences

The laws concerning international inheritance involving China are codified in the Chapter 4 “Inheritance” Section of the Law of the People’s Republic of China on the Application of Laws to Foreign-related Civil Relations Decree of President. It stipulates as follows.

• Statutory inheritance is governed by the law of the habitual residence of the deceased at the time of death. For real estate, statutory inheritance follows the law of the location of the real estate.
• Testamentary succession is valid if it conforms to the law of the habitual residence of the testator at the time of making the will or at the time of death, the law of the testator’s nationality, or the law of the place where the will was made. The effectiveness of the will is determined by the law of the habitual residence of the testator at the time of making the will or the law of the testator’s nationality.
• Matters related to estate administration are governed by the law of the location of the estate.
• In cases where there are no heirs to inherit the estate, the law of the location of the estate at the time of the deceased’s death applies to determine the ownership.

Due to the involvement of multiple jurisdictions and laws from different countries, not all situations clearly indicate which laws apply. Without further clarification in the will or related agreements regarding the applicable laws, choosing a method of inheritance that is more convenient or advantageous to oneself at the time of inheritance may pose difficulties for cross-border inheritance.

Restrictions on Asset Outflows

The State Administration of Foreign Exchange explicitly stipulates that Chinese residents must strictly adhere to foreign exchange controls. Whether purchasing or remitting foreign exchange, individuals must comply with the annual foreign exchange quota of USD50,000 or its equivalent in other currencies. If exceeding this quota, relevant documentation must be provided to the authorities.

According to the “Interim Measures for the Administration of Foreign Exchange Sales and Payment for Transfer of Personal Property Abroad”, China allows domestic assets inherited by eligible individuals to be remitted abroad, but under certain conditions.

• Firstly, the main applicants permitted to remit assets abroad through inheritance are foreign citizens and residents of Hong Kong SAR, Macau SAR, and Taiwan Region. This does not include mainland Chinese residents who have immigrated but have not acquired foreign citizenship, such as individuals holding a US green card without US citizenship. They are unable to remit assets abroad through inheritance.
• Secondly, applicants must prove the legal ownership of the property being transferred abroad and provide tax payment certificates. The legitimacy of inherited property can be established through ownership certificates or registration certificates, while tax payment proof requires tax certificates or documents issued by the tax authorities where the inherited property is located.
• In practice, some high net worth families may encounter difficulties in proving the source of acquisition or tax compliance status of their assets acquired in earlier years, resulting in documentation flaws or challenges.

Tax Costs

Chinese parents may encounter tax and reporting issues when passing on assets to their foreign children. Although there is currently no succession tax or gift tax in China for foreign children inheriting assets in the country, foreign individuals may still bear the risk of paying income tax in their home countries for such overseas inherited income.

Technically, China does not have forced heirship laws, but it has some similar provisions. For instance, the inheritance share for a fetus should be reserved during legacy division. Also, necessary assets should be preserved for heirs who are unable to work and have no means of support.

The PRC Civil Code defines marital common property as the property acquired by spouses during the existence of their marriage. The term “acquired” refers to the property obtained by either or both spouses, including jointly acquired property or property acquired individually by one spouse. This definition focuses on property rights rather than the actual possession of the property. For instance, property obtained by one spouse through a lottery win, even if not physically possessed at the time of divorce, is still considered property acquired during the marriage.

Regarding “inherited or gifted property”, the exception applies when a will or gift contract specifies that the property belongs exclusively to one spouse.

Under the PRC Civil Code, both spouses have equal rights to possess, use, benefit from, and dispose of marital common property. Except for matters within the scope of daily household affairs or those constituting express authorisation, any unilateral disposition of jointly owned property by one spouse does not have legal effect on the other spouse. To safeguard the lawful rights and interests of both parties regarding marital common property, the Civil Code also provides remedies if one spouse intentionally conceals, transfers, sells, damages, squanders any common property, or fabricates joint debts without the other’s consent. In such cases, the aggrieved spouse can petition to the people’s court for division of the marital common property. During divorce proceedings, the court may allocate a lesser share or no share to the offending spouse.

Under the PRC Civil Code, spouses can establish agreements regarding property relations, categorised as prenuptial agreements and postnuptial agreements based on when they are executed. Both types require a written form according to the Civil Code. The details are as follows.

Prenuptial Agreements

These are commonly notarised agreements.

The Civil Code specifies and supports the legality for this kind of agreement by stating: “Men and women can agree on the property acquired during the marriage and pre-marital property either belonging separately, jointly, partially separately, or partially jointly.”

A prenuptial agreement becomes effective upon the establishment of the marriage.

Clauses in prenuptial agreements that do not pertain to property regime are not necessarily legally binding. For instance, agreements on post-divorce property distribution and child custody arrangements in practice are often deemed to be separate from the prenuptial agreement, as according to judicial interpretations, both parties have the right to change their minds before formal divorce proceedings.

Postnuptial Agreements

Similar to prenuptial agreements, property-related clauses are binding on both parties unless there are on invalid grounds.

Any unilateral donation of jointly owned property by one spouse without the consent of the other is considered invalid.

Agreements that contradict general public norms or those that go against social morality are deemed invalid.

Specifically, clauses regarding fidelity obligations between spouses are not automatically valid and often enforceable only when determining compensation for mental damages.

These agreements play a crucial role in regulating property rights between spouses under Chinese law, providing legal clarity and protection in various marital situations.

New Developments in 2025

Notably, the Supreme People’s Court’s Interpretation, effective 1 February 2025, refines the rules on marital property in China. The new rules highlight property division issues for new forms of relationships, such as cohabitation, and set more nuanced standards for dividing jointly acquired assets based on each party’s contribution. For marital real estate and parental gifts, division now depends more on the intent, the source of the asset, and other equity factors. Critically, one spouse may not dispose of significant marital property without the other’s consent ‒ recent guidance even treats excessive “tipping” to online streamers using joint funds as wasteful conduct, justifying an unequal division of assets. The interpretation also strengthens protections for vulnerable parties by allowing courts to grant compensation for care-giving or support to spouses facing hardship. These advances aim to better balance contractual liberty, joint ownership, and fairness in the context of modern family relationships.

For inheritance matters in China, there is currently no inheritance tax or gift tax imposed. However, if an inheritor sells inherited real estate or vehicles, they are subject to individual income tax. Additionally, when inheriting property, stamp duty is required to be remitted.

Specifically, statutory heirs inheriting land or property rights are exempt from deed tax; whereas non-statutory heirs inheriting land or property rights through a will are considered as having received gifts and are subject to deed tax.

Regarding transfers of assets during one’s lifetime, individual income tax is applicable, but exemptions are provided for transfers between close relatives. For instance, according to State Administration of Taxation Announcement No 67 of 2014, transfers of equity to spouses, parents, children, grandparents, grandchildren, siblings, as well as caregivers with direct nurturing obligations, are exempt from individual income tax if transferred at nil consideration. Similarly, exemptions exist for the incidental income tax on gratuitous transfers of real estate between close relatives (see details in 1.1 Tax Regimes).

Currently, there is no inheritance tax or gift tax in China, so there is no requirement to pay corresponding taxes when transferring assets to the next generation. If such taxes are legislated in the future, China might refer to models from other countries.

It is recommended that high net worth families establish family trusts for tax planning purposes. This approach can potentially reduce the burden of inheritance and gift taxes. By establishing trust terms, families can also exert control over the use and distribution of assets, thereby minimising tax liabilities to the greatest extent possible.

In China, according to Article 124 of the PRC Civil Code, virtual property can be inherited in accordance with the law. Practices typically follow provisions in laws such as the Data Security Law and the Personal Information Protection Law. Generally, the inheritance of digital assets is implemented through agreements and wills.

It is important to note a specific concern regarding cryptocurrencies. The notice issued by Chinese authorities including the Supreme People’s Court, the Supreme People’s Procuratorate, the Ministry of Public Security, and the China Securities Regulatory Commission explicitly states that activities related to virtual currencies constitute illegal financial activities. Moreover, civil legal actions related to natural persons investing in cryptocurrencies and related derivatives that violate public order and good customs are deemed invalid. This regulatory stance introduces legal risks, potentially rendering inheritance of cryptocurrencies invalid under civil law in China.

In China, foundations are often used for tax planning purposes, while trusts are primarily used for estate planning.

• Individuals and businesses can reduce their income tax by making charitable donations to foundations.
• According to the “Enterprise Income Tax Law” and the Notice [2018] No 15 on Finance and Taxation, enterprises are allowed to deduct donations made to public welfare organisations, county-level people’s governments, their departments, and directly affiliated institutions for charity activities and public welfare undertakings.
• Donations within 12% of annual total profits are deductible when calculating taxable income; any excess can be carried forward and deducted within the next three years.
• According to Announcement No 99 of the Ministry of Finance and the State Taxation Administration in 2019, individuals can deduct charitable donations made through public welfare organisations within the territory of the People’s Republic of China, county-level or higher people’s governments, their departments, and other national agencies for education, poverty alleviation, and other charitable activities when calculating taxable income, according to relevant provisions of the individual income tax law.
• The deduction limit for deductions from comprehensive income and business income is 30% of the taxable income for the current year; for deductions from categorised income, it is 30% of the taxable income for the current month.

Article 1133, paragraph 4 of the Chinese Civil Code stipulates: “Natural persons may establish testamentary trusts in accordance with the law.”

• Testamentary trusts have gained widespread attention since the release of the “Notice on Standardizing the Classification of Trust Business of Trust Companies” by the China Banking and Insurance Regulatory Commission (now the National Financial Regulatory Authority) in 2023, due to their strong confidentiality, simplicity, low establishment costs, high flexibility, and the advantage that the settlor’s control over assets is unaffected during their lifetime.
• However, there are no established systems or rules for property transfer (registration) based on trusts. When non-monetary assets such as equity and real estate are used to establish testamentary trusts, they may face double taxation issues (paying taxes twice consecutively upon transfer of property to trustees and distribution of trust property to beneficiaries, such as income tax, stamp duty, and deed tax).

Trusts are widely recognised and legally protected in China, with the Trust Law formally enacted as early as 2001.

According to Article 8 of the Trust Law, the establishment of a trust must be in written form, which includes a trust deed, a will, or other written documents specified by laws, administrative regulations, or rulings. The trust industry is an integral part of China’s financial system, and the issuance of documents such as the “Notice on Standardizing the Classification of Trust Business of Trust Companies” indicates that the government is actively increasing efforts to regulate and standardise this industry.

According to Articles 19, 24 and 43 of the PRC Trust Law, individuals, legal persons and non-legal person organisations can all act as parties to a trust. However, companies holding trust licences issued in China, due to supervision by Chinese financial regulatory authorities, may be prohibited from serving as trustees for foreign trusts. This restriction does not apply to Chinese individuals or non-financial institution legal persons. On this premise, under Article 35 of the Trust Law, trustees can benefit from the trust according to the trust deed but cannot be the sole beneficiary of the trust.

Currently, Chinese tax laws do not specify how income from property held by trustees in trust is taxed. Supporting tax declaration and collection measures have not yet been established.

Under the PRC Trust Law, trusts are not explicitly categorised as revocable or irrevocable. In foreign jurisdictions, a revocable trust typically refers to a situation where the settlor can unilaterally terminate or revoke the trust. However, under the PRC Trust Law, there is currently no provision granting the settlor the unilateral right to terminate or revoke a trust, unless specific conditions outlined in the trust deed, Article 12 or Article 22 of the Trust Law occur.

Creditor’s Right to Revoke a Trust

Under Article 12, if a settlor establishes a trust that prejudices the interests of their creditors, the creditors are entitled to apply to the court to have the trust revoked. Importantly, revocation of the trust by the court does not affect the trust benefits already acquired by bona fide beneficiaries. The right to apply for revocation is subject to a limitation period: creditors must exercise this right within one year from the date they knew or should have known the grounds for revocation. Failure to do so will result in the right being extinguished.

Settlor’s Right to Revoke a Trust

According to Article 22 of the Trust Law, the settlor can only apply to the People’s Court to revoke the trust if the trustee disposes of trust property against the trust’s purpose or causes loss to the trust property due to improper management of trust affairs.

Therefore, in China, the concept of revocable trusts, as understood in other jurisdictions, does not apply in the same manner. The conditions to revoke a trust are strictly limited to situations where specified legal conditions are met, ensuring the legitimacy, protection and stability of trust arrangements under Chinese law.

In mainland China, two common methods of asset protection include the following.

Spousal Property Agreement

According to Article 1065 of the PRC Civil Code, spouses can agree on the ownership of property acquired during their marriage, either separate, joint, or partially separate and partially joint. It is also possible to agree that property acquired during the marriage belongs separately to each spouse, and debts incurred by one spouse are their own responsibility.

This agreement is often used to protect one spouse’s assets from being affected by the debts of the other. However, for the agreement to be effective, it must be signed in writing to clearly define the division of property, and assets shall be managed separately in daily life to avoid confusion.

Life Insurance

Life insurance allows for the designation of beneficiaries without the need for inheritance notarisation, thus ensuring a more exclusive and definitive inheritance. In recent years, high net worth individuals in China have increasingly chosen life insurance for asset protection, which also plays a role in asset isolation, risk mitigation, and tax planning.

These methods not only effectively protect personal or family assets but also provide professional and precise arrangements for inheritance.

In mainland China, family businesses typically use a structure combining family trusts and limited partnership enterprises for inheritance planning.

The settlor (beneficiary) establishes a limited partnership (LLP) enterprise to indirectly hold equity in the target company. The trustee of the family trust acts as a limited partner in this LLP, while the settlor or their designated institution serves as the general partner.

• In this structure, the family trust indirectly holds shares in the target company through the LLP. The trustee’s role is primarily to participate in decision-making on significant matters but without day-to-day operational management obligations (which are typically handled by the settlor for the partnership enterprise).
• This set-up reduces the management responsibilities of the trust company towards the target company while still ensuring its right to information and oversight.
• It further meets the settlor’s need to maintain control over the operations, decisions, and management of the target company.
• This use of the limited partnership structure also offers certain deferred tax benefits.

According to the administrative measures issued by the State Taxation Administration, the Chinese tax authorities regulate the “reasonable value” of partial interest transfers. When an individual transfers a partial interest in an entity to another person or a legal entity at an obviously undervalued price, the tax authority is entitled to assess the transaction based on the fair value of the equity.

Fair value is primarily determined with reference to the per-share net assets or the net asset proportion corresponding to the equity recorded on the financial books, or by comparing the income from other equity transfers under the same or similar conditions by the same or other shareholders of the enterprise.

Therefore, the fair value of equity is assessed by standardised methods and will not be adjusted for factors such as lack of marketability or discounts related to the transfer of control. Even if the transaction occurs at a lower price, the reasonable fair value for tax purposes will, in the majority of cases, be determined based on the book value.

Currently, trust disputes are less common in Mainland China, and are typically resolved through litigation in courts with enforceable judgments.

On the other hand, disputes related to testamentary inheritance occur all the times in China. Key challenges in these cases include four main points:

• determining whether the will truly reflects the intentions of the deceased;
• assessing the legality when executing the will;
• defining scope of the will; and
• determining whether heirs accept the bequest.

The Chinese judicial system consistently promotes diversified approaches to resolving such disputes, including facilitating negotiation and mediation between parties.

According to China’s Trust Law, in a dispute involving a trust, the trustee may be required to compensate the beneficiary for losses mainly due to the following.

Breach of Duty of Loyalty

According to Articles 25 and 26 of the Trust Law and the Administrative Measures on Assembled Funds Trust Schemes of Trust Companies for the pooled Funds of the Trust Company, trustees are prohibited from seeking benefits for themselves or third parties, and they must refrain from engaging in actions that conflict with the interests of the beneficiary.

Breach of Duty of Care

Though PRC law does not specify detailed provisions regarding duty of care, according to relevant cases in China, trustees are expected to maintain a level of care in line with industry standards throughout the entire process of asset investment and management. This includes ensuring the ability to identify risks and manage them appropriately.

According to China’s Trust Law, individuals, enterprises, and organisations can all serve as trustees. However, under the “Administrative Measures for Trust Companies”, establishing a trust company requires approval from the China Banking and Insurance Regulatory Commission (CBIRC) and obtaining a financial licence, leading to a prevalence of corporate trustees holding trust operation licences in the practice of trust cases in China.

Due to regulatory measures imposed on financial institutions, corporate trustees with these licences are held to higher standards of conduct.

Article 22 of the Trust Law explicitly states that, “[w]here trustees violate the intent of the trust when carrying out the disposition of the trust property or cause losses to the trust property because of breaching their administrative duties or handling trust affairs in an inappropriate manner, the beneficiary has the right to apply to a people’s court to revoke the act of disposition as well as having the right to require the trustees to restore the trust property to its original state or pay compensation”.

Trustees may include provisions in the trust deed, including exemptions from trust responsibilities. However, it is crucial to note that such clauses must not contradict relevant provisions of laws and regulations.

The “Notice on Standardizing the Classification of Trust Business of Trust Companies” (YinBaoJianGui [2023] No 1), issued by the China Banking and Insurance Regulatory Commission, contains regulations concerning a fiduciary’s investment of assets. The key provisions include:

• trustees, when engaging in asset investment, asset management, public welfare, and other trust business functions, must adhere to standards consistent with the “Guiding Opinions on Regulating the Asset Management Business of Financial Institutions”;
• trustees must manage trust affairs in the best interests of beneficiaries, fulfilling their entrusted responsibilities with honesty, diligence and accountability;
• the definition of classification criteria; and
• the stipulation of classification standards and operational requirements for the trust industry.

Although this document lacks legal enforceability, it serves as policy guidance for the industry. It directs the development of the trust system in China, providing a broad direction for industry practices.

The China Banking and Insurance Regulatory Commission categorises commercial trust products into three types: asset management trusts, asset service trusts, and public welfare trusts.

• In China’s trust industry, asset management trusts are akin to private equity funds, where trustees diversify risks through various investment combinations. Currently, industry regulations do not specify proportions, types, or quantities, therefore typically relying on trustees’ market judgments.
• Asset service trusts are highly customised, with trustees tailoring financial trust products according to the beneficiary’s instructions, implementing each step as per the trust deed or other written agreements.

Under these two distinct models, trustees may manage investments based on their own proactive decisions or according to the beneficiary’s wishes, which may also include operational management of entities. Currently, there are no specific rules or restrictions governing such activities.

Residence and domicile, and residents and citizens, are two sets of seemingly similar but fundamentally different concepts.

Residence

Residence is determined based on registration, and refers to the primary place where a person conducts civil activities, crucial for legal matters like guardianship and debt fulfilment.

A natural person’s habitual residence for over a year can be considered as their residence, while obtaining a residence permit does not confer rights equivalent to those of registered residence, such as voting rights, educational rights for children, and certain other social welfare benefits.

Domicile

Domicile can be acquired or changed.

The concepts of being domiciled and resident are similar and can be acquired through long-term residence, among other behaviours.

Resident

This refers to individuals or legal entities engaged in production and consumption in their own country for an extended period.

In principle, anyone with a residence in China or who resides in China for a cumulative total of 183 days or more within a tax year can become a resident.

Further, according to the Regulations on the Administration of Permanent Residence of Foreigners (Revision Draft for Comment), foreign citizens who have made outstanding contributions, achieved international recognition, are needed for policy reasons, or have worked in China with a good reputation may apply for permanent residency in China.

Citizenship

See 7.2 Expeditious Citizenship.

On a global scale, acquiring PRC nationality involves high thresholds and rigorous scrutiny. The primary avenues for obtaining PRC nationality are through birthright or naturalisation applications.

Birthright

There are two main conditions for acquiring PRC nationality at birth: by bloodline or by place of birth. Children born abroad to Chinese citizen parents are eligible for PRC nationality unless both parents – or one parent – have settled abroad and the child is born there. Additionally, non-Chinese lineage individuals – ie, whose parents do not hold Chinese nationality but settle in China, can also acquire PRC nationality if they are born in China.

Naturalisation Applications

Those applying for nationality after birth must satisfy one of the conditions stipulated in the Nationality Law. These conditions include:

• close family ties – for foreign nationals who have been married to a Chinese citizen of the opposite sex for over five years, have spent 75% or more of the year living in China, and have stable employment, this is often considered the fastest route for foreign nationals to acquiring PRC nationality;
• permanent residency; and
• other legitimate reasons.

It is important to note that Chinese law does not recognise dual nationality. Foreigners who acquire Chinese nationality are required to renounce their foreign nationality status.

With the advancement of laws and legislation, the attention to the special needs population is gradually being recognised. In recent years, the emergence of the Special Needs Trust System has helped to fill this gap, which effectively assisted to alleviate the concerns and pressures of the larger population which are families of the mentally challenged and the elderly.

Special Needs Trust

In 2023, the regulator issued the Circular on Matters Relating to the Classification of Trust Business, which for the first time formally listed “Special Needs Trust” as one of the seven business varieties developed for wealth management, reinforcing the nation’s focus on the special needs population.

A Special Needs Trusts is defined as a trust established by the entrustment of a single natural person, or jointly by a single natural person and their relatives, to manage and dispose of the trust property with the main trust purpose of meeting and serving the living needs of specific beneficiaries. These Trusts are mainly designed for vulnerable groups such as minors, the elderly, and those with mental and physical disabilities. They utilise the risk-isolation function of the trust system to secure the incapacitated individual’s assets as well as to ensure they are being properly taken care of, effectively mitigating any potential moral risks for the guardian. For example, an “orphan trust” provides survival protection for incapacitated children whose parents may pass away before them.

Social Guardianship Institutions

Under the PRC Civil Code, if an adult with no or limited civil capacity has no guardian, the court will appoint the civil affairs department or other social guardianship institutions as the legal guardian. However, since guardianship requires a high threshold of experience, financial and other social responsibility, it is not a long-term solution to rely on a non-professional institution, such as the civil affairs department, to support vulnerable groups.

In 2024, the courts in Shanghai issued a landmark ruling in the PRC, where a social guardianship institution was directly assigned to act as a guardian, replacing the civil affairs department. The court held that due to the high professional requirements and significant legal responsibilities, the civil affairs department shall delegate specific guardianship matters to, more professional institutions that have the necessary personnel, time, and expertise. This jurisprudence emphasises the increasingly important role that professional social guardianship institutions are expected to play in the safeguarding of special groups.

In China, the appointment of a guardian usually involves the court, but it is not always necessary. The role of the court in the litigation process mainly serves as a safeguard in the appointment of a guardian. According to Article 31 of the Civil Code, if there is a dispute over the appointment of a guardian, the guardian shall be appointed by the residents’ committee, villagers’ committee or civil affairs department of the place where the guardian resides. If the relevant party disagrees with this appointment, they may apply to the court for a judicial determination; the relevant party may also directly petition the people’s court for the appointment of a guardian. In addition to appointing guardians, the court also continues to perform supervisory duties.

Laws to protect children are future-oriented laws, and guardians undoubtedly play a crucial role in safeguarding minors. The law has reinforced this notion by imposing stricter requirements on guardians.

Parents are the legal guardians of their children. The PRC Civil Code stipulates that parents who fail to perform their guardianship duties or who infringe upon the lawful rights and interests of the child may be disqualified by the court, and a new guardian shall be appointed.

Social rights organisations such as schools, medical institutions, women’s federations, residents’ committees, civil affairs departments, courts and other relevant departments are empowered to supervise the actions of guardians. These entities have the right to appoint guardians, be appointed as temporary guardians, and apply for the disqualification of guardians.

Personal Pension

In terms of policy, in order to cope with the increasing aging population, on 12 December 2024, the Ministry of Human Resources and Social Security, along with five other departments, issued the Notice on the Comprehensive Implementation of the Personal Pension System. This initiative will expand the previously piloted personal pension system from select cities to the whole country. The personal pension is a supplementary pension insurance system characterised by voluntarily participation, market-oriented operation, and the support of national policies. Individuals voluntarily deposit a sum of money in a specific account, not exceeding CNY12,000 per year, to purchase approved financial products. When they reach retirement age, this will serve as an additional source of pension supplementary to the basic pension insurance.

Moreover, personal pension contributions are eligible for preferential deferred taxation. In addition, if certain conditions are met, individuals can apply for the early withdrawal of their personal pensions. In addition to these benefits, there are preferential pension policies such as increased special additional deductions for taxpayers who support parents over 60 years old, exemptions from value-added tax on elderly care services provided by elderly care institutions, and tax reduction and exemption on the income of community elderly care facilities.

Accumulative Whole-Life Insurance

With the advances in medical technology and the increase in average life expectancy, Incremental Whole Life Insurance (IWL) has become a new and increasingly popular life insurance product in response to the gap between perceived and actual life expectancy.

IWL, as the name suggests, refers to a whole life insurance product, of which the cash value and the amount of cover increase as time goes by. This product is particularly suitable for the current era of longevity, and on average, its value is likely to exceed the premium paid.

Particular attention is paid on the protection of children’s interests under the PRC law, with special articles designed and imposed specifically for children born out of wedlock, adopted children and posthumously conceived children.

Children Born Out of Wedlock

Overall, the PRC law offers the same level of protection for children born out of wedlock and adopted children. In 2020, the original “Marriage and Family Law” was compiled by the PRC Civil Code and merged into its Marriage and Family Section, which explicitly gives children born out of wedlock the same rights as those born in wedlock.

In particular, the definition of “children” under the PRC Civil Code equally includes and refers to children born out of wedlock, adopted children and children born in wedlock, giving each of the foregoing equal legal status at law, including inheritance rights.

Usually, children born out of wedlock need to provide a paternity test report to confirm their identity in order to legally enjoy the right to inheritance (including through legal or testamentary succession). With the report, the law will automatically presume legal status even if objections or queries are raised by any other party.

Adopted Children

To protect the rights and interests of adopted children, the Marriage and Family section of the PRC Civil Code emphasises that adoption should follow the principle that is in the best interest of the adopted child, and expressly prohibits the sale of minors in the name of adoption. For example, to be eligible as an adopter, one needs to fulfil all the conditions listed below:

• have no children or only one child;
• have the ability to bring up, educate and protect the child;
• not suffer from a medical condition which would be deemed as inappropriate to adopt a child;
• not have a criminal record that would have an adverse influence on the healthy development of the child; and
• be over 30 years of age (for unmarried individuals, the age difference between such individual and the child shall at least be 40 years).

Surrogate Children

China has strict laws and regulations imposed against surrogacy. The “Measures for the Administration of Human Assisted Reproductive Technologies” expressly prohibits and bans medical institutions and personnel from implementing surrogacy technology with serious legal consequence and penalties.

Although the country expressly prohibits the implementation of surrogacy technology, there are no explicit penalties imposed for the surrogate mother, and no rulings which deny the equal legal status of surrogate children from children born through other legal means.

Posthumously Conceived Children

For posthumously conceived children, the PRC legal system implements a mechanism in terms of which portions of an estate can be reserved to accordingly protect the child’s legal inheritance rights. The PRC law stipulates that natural persons enjoy capacity for civil rights from birth, therefore, an unborn fetus in principle cannot be deemed as a civil subject under the PRC law. In order to protect the legitimate rights and interests of the fetus, based on the PRC Civil Code, at the time when estate is partitioned, reservation shall be made for the share of any unborn child.

The law provides that an unborn child is entitled to inheritance upon the death of their parent, meaning that the unborn fetus shall be deemed as a “child” and inheritor first in order, entitled to inherit the corresponding share in estate.

The PRC law does not currently support same-sex marital relationships; specifically, same-sex couples are not afforded the same level of protection as heterosexual couples through marriage regimes, but there are still some preferred planning mechanisms in place to support same-sex couples in caring for and supporting each other.

Same-Sex Marriage

The Marriage and Family Section of the PRC Civil Code was formulated entirely from the perspective of heterosexual marriages, which clearly stipulates that “the marriage system of freedom of marriage, monogamy and equality between men and women shall be implemented”, without legal recognition to same-sex marriages or partnerships.

Other Preferred Planning Mechanisms

On the premise that same-sex couples do not have access to the same protection and legal recognition as heterosexual couples, the following are some of the possible ways to protect same-sex couples from possible risks.

Guardianship

With the enactment of the PRC Civil Code, same-sex couples are given the right to become the intended guardians of the other party, who is able to fulfil the duties of guardianship in the event the other party lose their civil capacity entirely or partially, with the following requirements:

• the guardian is a person of full civil capacity;
• the guardian was appointed in writing; and
• the guardian was appointed when the other party had full civil capacity.

Asset management

Under the PRC Civil Code, the parties may sign a “gift contract” during their lifetime whereby the donor agrees to give their property to the donee at nil consideration, with the donee indicating their acceptance. Similarly, a legacy also requires the donee to expressly indicate their acceptance within 60 days of becoming aware of the legacy. Alternatively, the parties can offer their partner economic protection through the signing of a legacy support agreement that survives legal succession. It is important to note that, with respect to economic interests, the parties shall avoid the potential risk of the donor exercising an arbitrary revocation right by notarising the written agreements.

Attention to charity has seen an upward trend in the PRC.

• In 1999, the Law on Public Welfare Donations was promulgated to encourage and regulate donations for the promotion of public welfare.
• In 2016, the Charity Law was promulgated to further expand the scope of standardised social welfare activities, raising the thresholds for government and other organs to organise and promote charitable activities.
• In 2023, the newly revised Charity Law (effective in September 2024), specifically added a section on “emergency charity” to accommodate latest news and events. The newly added section allows national charitable organisations to react quickly when faced with emergency events.

On the other hand, charitable donation is promoted in the PRC through various incentive mechanisms including preferential tax policies for both the charitable organisation and donors. Based on the Corporate Income Tax Law and the Individual Income Tax Law:

• the part of expenditure on public welfare donations incurred by an enterprise within 12% of the total annual profit may be deducted when calculating the taxable income amount;
• where individuals donate their income to public welfare and charitable undertakings such as education, poverty alleviation, etc, the part of the donation that does not exceed 30% of the taxable income declared by the taxpayer may be deducted when calculating the taxable income amount; and
• any part exceeding the legal limit is subject to a grace period of deduction within three years.

The strength of the above policies indicates that donation is not a common phenomenon in China. In fact, generally speaking, only a small percentage of donation occurs during one’s life and the majority occurs after death.

As donations can only be made based on the donor’s subjective wishes, based on current laws and legislation, intended inheritance is currently the only way that public welfare organisations can accept inheritance donations. At the same time, the PRC also encourages inheritance donation, by policies including tax incentives to individuals or enterprises that donate their inheritance into charitable funds.

The most commonly used structures for charitable planning in China are as follows.

Foundation

This is a non-profitable legal entity that uses donated assets to promote and develop public welfare undertakings.

Overall, foundations are subject to stricter requirements on organisational structure, integrity norms and governance, which makes their establishment rather challenging. Accordingly, the number of foundations is the least among the three commonly used structures.

From another perspective, stricter requirements facilitate the building of public confidence and trust that foundations have the highest credibility, reliability, and relatively low corruption rate. This makes foundations a trustworthy choice, with the ability to attract more and higher amounts of public funds for different fields of welfare undertakings.

Social Organisation

This is formed voluntarily by citizens to realise the common wishes of members and carry out non-profitable activities in accordance with its by-laws.

The threshold for the establishment of social organisations is relatively high, as these are incorporated dependent on the unity of their members, and this structure is good at mobilising “like-minded” individuals in society to form a group. A common example of a social group is a public welfare volunteer organisation.

The drawback of this structure is when major conflicts or trust crises arise within the organisation, and due to a lack in stringent organisational structure in social organisations and governance, major internal conflicts could materially impair its normal operation.

Social Service Organisations

These organisations are formed mainly to utilise non-state-owned assets and to engage in non-profitable social service activities.

Social service organisations are more loosely regulated and may be set up on an ad hoc basis with specific short-term goals. This form of structure is usually formed with high degree of professionalism and concrete goals, making it easier for social service workers to initiate public welfare projects for charity and assistance.