The Ministry of Finance and the State Taxation Administration have jointly announced that starting from September 1st, dividends and bonuses earned by foreign individuals from foreign-invested enterprises will be subject to individual income tax at a 20% rate.

According to the Individual Income Tax Law, dividends and bonuses received by individuals are generally taxed at a 20% rate. However, to promote economic reform and attract foreign investment, China had provided a temporary exemption on this type of income for foreign individuals since 1994.

Li Xuhong, Vice President of the Beijing National Accounting Institute, stated that internationally, once an economy reaches a certain stage of development, it typically shifts from relying on tax incentives to attract foreign capital towards focusing on a stable, sound, and fair market environment. The policy adjustment is conducive to maintaining tax fairness and uniformity, fostering a healthier environment for foreign investment, closing tax loopholes, and advancing the development of a unified national market.

Regarding whether the tax burden on foreign individual shareholders of foreign-invested enterprises will increase after the abolition of the exemption, Liu Yi explained that major Western countries implement a worldwide taxation system for residents, which means taxing the global income of resident individuals. When foreign individuals earn dividends from foreign-invested enterprises in China, even if they enjoyed a tax exemption within China, they are still required to pay the corresponding tax in their country of residence, meaning their actual tax burden was never reduced. With the exemption now removed, the individual income tax paid in China can be credited against the taxes owed in their home country, so their overall actual tax burden will not increase.