China's Ministry of Finance and the State Taxation Administration jointly announced today that starting September 1, foreign individuals receiving dividends and bonuses from foreign-invested enterprises will no longer be exempt from Individual Income Tax.

Following this policy adjustment, in accordance with China's Individual Income Tax Law, such income derived from foreign-invested enterprises will now be subject to taxation under the "interest, dividends, and bonuses" category, applying a 20% tax rate.

Since 1994, China has offered tax exemption on dividends for foreign individuals from foreign-invested enterprises. During the early stages of reform and opening-up, this policy played a positive role in attracting foreign investment.

However, in practice, some companies took advantage of the exemption by first converting into foreign-invested enterprises and then distributing substantial dividends to transfer assets while enjoying tax benefits. Li Xuhong, Vice President of the Beijing National Accounting Institute, noted that from a tax fairness perspective, when investors receive dividends from an invested enterprise, it is clearly inequitable for foreign investors to enjoy tax exemption while domestic investors must pay taxes.

Moreover, as the construction of a high-level socialist market economy system continues to advance, foreign capital now focuses more on the overall business environment, including the rule of law, market scale, and industrial support. Relying on tax policies that create an imbalance between domestic and foreign investment is no longer compatible with the current new circumstances and requirements.

Experts point out that major Western countries implement a worldwide taxation system for residents' global income. Under this system, even if foreign individual shareholders enjoyed tax exemption in China on dividends from foreign-invested enterprises, they would still need to pay the corresponding taxes in their home countries. After the cancellation of this exemption, the Individual Income Tax paid in China can be used to offset taxes owed to their home countries, meaning their actual tax burden will not increase.