The Ministry of Finance and the State Taxation Administration jointly issued an announcement today (the 1st), stating that starting from September 1st, dividend and bonus income derived by foreign individuals from foreign-invested enterprises will no longer be exempt from individual income tax. This marks a significant shift in the tax treatment of foreign investors' earnings within China.

Following this policy adjustment, in accordance with China's Individual Income Tax Law, such income received by foreign individuals from foreign-invested enterprises must now be taxed under the category of "interest, dividends, and bonuses," subject to a 20% tax rate. This change eliminates a long-standing preferential tax treatment that had been in place since 1994.

The exemption, introduced in 1994, was designed to attract foreign capital during the early stages of China's reform and opening-up, and it did play a positive role in that regard. However, during the implementation process, some enterprises exploited the policy by first restructuring themselves into foreign-invested entities, then distributing large-scale dividends to transfer assets while enjoying the tax exemption benefits.

Li Xuhong, Vice President of the Beijing National Accounting Institute, commented that from the perspective of tax fairness, when both domestic and foreign investors receive dividends from an invested enterprise, it is clearly inequitable for foreign investors to be exempt from tax while Chinese investors are required to pay. Furthermore, as the construction of a high-level socialist market economy system progresses, foreign investment is increasingly attracted to China based on the overall business environment, including the rule of law, market scale, and industrial supporting facilities. Continuing to rely on tax policies that create imbalances between domestic and foreign investors no longer aligns with the current situation and new requirements.

Experts have noted that major Western countries implement a worldwide taxation system for resident individuals. Consequently, foreign individual shareholders who received dividends from foreign-invested enterprises in China under the previous exemption would have been required to pay the corresponding taxes in their home countries. With the cancellation of this exemption, the individual income tax paid in China can now be credited against taxes owed to their home countries, meaning their actual tax burden will not increase.

The following is the full text of the announcement concerning the individual income tax policy on dividends for foreign individuals, issued as Announcement No. 27 of 2026 by the Ministry of Finance and the State Taxation Administration:

I. Dividend and bonus income obtained by foreign individuals from foreign-invested enterprises shall be subject to individual income tax under the "interest, dividends, and bonuses" category at a 20% tax rate.

II. Foreign-invested enterprises are required to withhold and remit the tax when paying dividends to foreign individuals, and must file and pay the tax within 15 days of the month following the payment. If the enterprise fails to withhold the tax, the foreign individual receiving the dividends shall pay the tax by June 30th of the following year; if the tax authorities issue a notice requiring payment within a specified period, the foreign individual must pay accordingly.

III. This announcement shall take effect on September 1st, 2026. Item 2, Paragraph 8 of the "Notice on Several Policy Issues Concerning Individual Income Tax" (Cai Shui Zi [1994] No. 20) issued by the Ministry of Finance and the State Taxation Administration shall be simultaneously repealed.