The Ministry of Finance and the State Taxation Administration jointly released an announcement today (the 1st), stating that starting from September 1, dividend income earned by foreign individuals from foreign-invested enterprises will no longer be exempt from individual income tax.

Under this policy adjustment, in accordance with China's Individual Income Tax Law, such dividend income derived by foreign individuals from foreign-invested enterprises will be subject to individual income tax under the "interest, dividends, and bonuses" category, at a rate of 20%.

Since 1994, China has exempted foreign individuals from individual income tax on dividends obtained from foreign-invested enterprises. During the early stages of reform and opening-up, this policy played a positive role in attracting foreign capital. However, during implementation, some enterprises exploited this provision by first converting into foreign-invested enterprises and then distributing substantial dividends to transfer assets while enjoying the tax exemption benefit.

Li Xuhong, Vice President of Beijing National Accounting Institute, stated that from the perspective of tax fairness, when investors receive dividends from an invested enterprise, it is clearly inequitable if foreign investors can enjoy tax exemption while Chinese investors are required to pay taxes. Moreover, as the construction of a high-level socialist market economy system continues to advance, foreign investors entering China now place greater emphasis on the overall business environment, including the rule of law, market scale, and industrial support. Continuing to rely on unbalanced tax policies between domestic and foreign investors to attract foreign capital is no longer compatible with the new circumstances and requirements.

Experts noted that major Western countries implement a global taxation system for resident individuals' income. When foreign individual shareholders receive dividend income from foreign-invested enterprises in China, even if they enjoy tax exemption benefits in China, they are still required to pay the corresponding taxes in their home countries. Following the abolition of this exemption policy, the individual income tax paid by foreign individuals in China can be credited against taxes owed to their home countries, meaning their actual tax burden will not increase.