China's Ministry of Finance and the State Taxation Administration jointly issued a public announcement on September 1, clarifying that starting from that date, foreign individuals receiving dividend and bonus income from foreign-invested enterprises must pay individual income tax at a rate of 20%.

According to the specific provisions of the Individual Income Tax Law, individuals are required to calculate and pay individual income tax at the 20% rate on dividend and bonus income. Historically, to promote reform and opening up while attracting foreign capital, China had implemented a policy since 1994 that temporarily exempted foreign individuals from individual income tax on dividends obtained from foreign-invested enterprises.

Liu Yi, Director of the China Fiscal and Tax Research Center at Peking University, explained that this exemption policy had been in place for over three decades and played a positive role in attracting foreign investment during a specific period. As China accelerates the construction of a high-level socialist market economy system, foreign investors are now placing more emphasis on the overall business environment, including the legal framework, market scale, and industrial supporting capabilities. Continuing to rely on an unbalanced tax policy between domestic and foreign investment to attract foreign capital no longer aligns with the new circumstances and requirements.

"Drawing on international experience, when a country's economy reaches a certain stage of development, it generally no longer depends on tax incentives to attract foreign investment, but instead focuses more on establishing a stable, sound, and fair market environment," noted Li Xuhong, Vice President of Beijing National Accounting Institute. This policy adjustment will help uphold tax fairness and uniformity, foster a healthier foreign investment environment, and also help close tax loopholes while advancing the construction of a unified national market.

Regarding whether the tax burden on foreign individual shareholders of foreign-invested enterprises will increase after the exemption is lifted, Liu Yi elaborated that major Western countries implement a global taxation system for resident individuals, meaning they tax the worldwide income of their residents. When foreign individuals receive dividend income from China's foreign-invested enterprises, even if they benefit from tax exemption in China, they are still required to pay the corresponding taxes to their resident countries, meaning their actual tax burden was never effectively reduced. After the cancellation of the exemption policy, the individual income tax paid in China can be credited against taxes owed to their resident countries, so the actual tax burden will not increase.