In a joint announcement released today, the Ministry of Finance and the State Taxation Administration confirmed that, effective September 1, dividends and bonuses earned by foreign individuals from foreign-invested enterprises will no longer be exempt from individual income tax.

Under the revised policy, these earnings will now be subject to personal income tax under the category of "interest, dividends, and bonus income" at a standard rate of 20%, consistent with the provisions of China's Individual Income Tax Law.

The exemption had been in place since 1994, originally serving as a key incentive to attract foreign capital during the early stages of China's reform and opening-up. However, in practice, some enterprises exploited the policy by first restructuring as foreign-invested entities and then issuing substantial dividends to shift assets and take advantage of the tax break.

Li Xuhong, Vice President of the Beijing National Accounting Institute, pointed out that the previous arrangement raised fairness concerns: both domestic and foreign investors receiving dividends from the same invested enterprise were treated differently, with foreign investors enjoying a tax exemption while Chinese investors remained liable for tax.

As China advances its high-standard socialist market economy, foreign investors are increasingly drawn to the overall business climate—including the legal environment, market scale, and industrial support—rather than preferential tax treatment alone. Continuing to rely on imbalanced tax policies between domestic and foreign investors no longer aligns with the current economic landscape and requirements.

Experts note that major Western economies generally tax their residents on worldwide income. Even when foreign individual shareholders previously received tax-exempt dividends from Chinese foreign-invested enterprises, they were still required to pay the corresponding tax in their home countries. With the removal of the exemption, personal income tax paid in China can now be credited against their tax obligations at home, meaning their overall tax burden will not increase.