A significant shift has occurred in China's individual income tax policy regarding dividends for foreign nationals, taking effect immediately on September 1st. The Ministry of Finance and the State Taxation Administration jointly issued a new announcement detailing that the previous tax exemption for foreign individuals receiving dividends and bonuses from foreign-invested enterprises has been officially revoked. Under the updated rules, this income will now be categorized under "interest, dividends, and bonuses" and will be subject to a 20% individual income tax rate.

This change marks the end of a preferential policy that had been in place for over three decades since 1994, which was originally designed to attract foreign investment into the country. Ge Yuyu, an associate professor at the Shanghai National Accounting Institute, explained that while the exemption served its purpose in the early stages of economic development, the current tax system places a greater emphasis on fairness and uniformity. Moreover, discontinuing this benefit helps close loopholes that allowed some individuals to exploit the system by obtaining foreign nationality to avoid taxes.

For foreign nationals from some countries, the impact may be mitigated by tax treaties, as the 20% tax paid in China on dividends can often be claimed as a foreign tax credit in their home country. The announcement also clarifies the administrative procedures for this new tax collection. Foreign-invested enterprises are now required to withhold the tax when distributing dividends to foreign individuals and must file and pay the tax to the tax authorities by the 15th of the month following the distribution. If the enterprise fails to withhold, the foreign individual is responsible for paying the tax by June 30th of the following year.

Where this fits in broader reforms

The termination of this dividend tax exemption is not an isolated event but part of a larger, ongoing effort to standardize and streamline China's tax incentive system. As part of the fiscal and tax reform plan set out by the central government in 2024, authorities have been actively reviewing and adjusting various preferential tax policies to reverse the trend of fragmentation. According to Vice Finance Minister Liao Min, the government is taking a systematic approach to review these previously established incentives, deciding which to eliminate and which to optimize. This year alone, nearly 100 tax preferential measures have been adjusted in a push towards a more unified and fair tax system.