Starting September 1st, foreign individuals receiving dividend and bonus income from foreign-invested enterprises in China will no longer be exempt from individual income tax, according to a joint announcement released today by the Ministry of Finance and the State Taxation Administration.
Following this policy adjustment, under the provisions of China's Individual Income Tax Law, such dividend and bonus income earned by foreign individuals from foreign-invested enterprises will now be categorized under "interest, dividends, and bonuses" and consequently subject to a 20% tax rate. This exemption, which has been in place since 1994, was originally implemented to attract foreign investment during the early stages of the country's reform and opening-up period.
However, the policy has faced challenges in implementation. Some enterprises have been found to restructure themselves into foreign-invested entities for the primary purpose of distributing large-scale dividends to transfer assets and improperly benefit from the tax exemption. Li Xuhong, deputy dean of Beijing National Accounting Institute, noted that from the perspective of tax fairness, the previous system created an inequitable situation where foreign investors could be exempt from taxation on the same type of investment income while their Chinese counterparts were required to pay taxes.
Furthermore, as China advances its high-standard socialist market economy, foreign investment decisions are increasingly driven by comprehensive business environment factors such as the rule of law, market scale, and industrial supply chains, rather than preferential tax treatment alone. The reliance on imbalanced tax policies between domestic and foreign investors is no longer aligned with current conditions and requirements. Experts point out that major Western economies typically implement worldwide taxation systems for their residents, meaning foreign nationals who enjoyed China's dividend tax exemption were often required to pay the corresponding taxes in their home countries. With the elimination of this exemption, the individual income tax paid in China can now be used as a credit against taxes owed in their home countries, ensuring that their overall tax burden remains unchanged.
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