China's Ministry of Finance and the State Taxation Administration jointly issued an announcement today (the 1st), stating that starting from September 1st, foreign individuals will no longer be exempt from individual income tax on dividend and bonus income derived from foreign-invested enterprises.

Following this policy adjustment, under China's Individual Income Tax Law, dividend and bonus income that foreign individuals receive from foreign-invested enterprises must be taxed under the category of "interest, dividends, and bonuses" at a rate of 20%.

Since 1994, China has exempted foreign individuals from individual income tax on such dividend income. During the early stages of reform and opening-up, this policy played a positive role in attracting foreign investment. However, during implementation, some enterprises circumvented the rules by first restructuring into foreign-invested entities, then distributing large-scale dividends to transfer assets while taking advantage of the tax exemption.

Li Xuhong, Vice President of Beijing National Accounting Institute, stated that from the perspective of tax fairness, when investors receive dividend distributions from an invested enterprise, it is clearly inequitable if foreign investors enjoy tax exemption while Chinese domestic investors are required to pay taxes.

Meanwhile, as China advances the development of a high-standard socialist market economy system, foreign capital entering the country now focuses more on the overall business environment, including the rule of law, market scale, and industrial supporting facilities. Continuing to rely on unbalanced tax policies between domestic and foreign investors to attract foreign capital is no longer compatible with the current new circumstances and requirements.

Experts noted that major Western countries implement a worldwide taxation system for resident individuals. Under this framework, when foreign individual shareholders receive dividend income from foreign-invested enterprises in China, they would still need to pay the corresponding tax difference to their home country even if they enjoyed an exemption in China. After the cancellation of this exemption policy, personal income taxes paid by foreign individuals in China can be credited against taxes owed to their home countries, meaning their actual tax burden will not increase.

Where this leaves investors

For foreign individual investors with holdings in Chinese foreign-invested enterprises, the practical implication is that the tax treatment of dividend income will now align with that of domestic investors. The change eliminates a long-standing preferential policy while bringing China's tax framework more in line with international practices, where tax credits prevent double taxation.