China Ends Tax Exemption on Dividends for Foreign Individuals from Foreign-Invested Enterprises
China's Ministry of Finance and State Taxation Administration announced that foreign individuals receiving dividends from foreign-invested enterprises must pay individual income tax at 20%, ending a tax exemption in place since 1994. The policy change aims to close loopholes where domestic firms converted to foreign-invested status to avoid taxes, aligning with broader market unification and tax reform goals.
The Ministry of Finance and the State Taxation Administration have issued the "Announcement on Individual Income Tax Policy for Dividends and Bonuses of Foreign Individuals," clarifying that dividends and bonuses derived by foreign individuals from foreign-invested enterprises are subject to individual income tax under the category of "interest, dividends, and bonuses," at a tax rate of 20%. Under the Individual Income Tax Law, individuals receiving dividends and bonuses are required to calculate and pay individual income tax at a rate of 20%. Since 1994, China had temporarily exempted foreign individuals from individual income tax on dividends and bonuses derived from foreign-invested enterprises. This announcement explicitly terminates that tax exemption policy.
As economic and social conditions have evolved and the market economy system has matured, the previous tax policies that treated domestic and foreign enterprises differently are no longer suited to the current situation. During the implementation of the original policy, some domestic enterprises first converted into foreign-invested enterprises, then distributed large-scale dividends to transfer assets and exploit the tax exemption, infringing on national tax interests and undermining fair market competition. The Third Plenary Session of the 20th Central Committee of the Communist Party of China proposed "building a unified national market," "improving the foundational systems of the market economy," and "perfecting a tax system conducive to high-quality development, social fairness, and market unity." The Third and Fourth Plenary Sessions of the 20th Central Committee explicitly required "regulating tax preferential policies."
China continues to optimize the environment for foreign investment, encouraging and supporting high-quality foreign enterprises to deepen their presence in the Chinese market. The 15th Five-Year Plan outline calls for greater efforts to attract and utilize foreign investment, continuously improve the foreign investment environment, strengthen the service and guarantee system for foreign investment, and create new advantages in attracting foreign capital.