China will impose a 20% individual income tax on dividends and bonuses received by foreign individuals from foreign-invested enterprises from Sept 1, ending a tax exemption that has been in place for more than three decades.
According to a joint announcement by China’s Ministry of Finance and State Taxation Administration, foreign individuals receiving such income will now be subject to the same 20% tax rate prescribed under the country’s individual income tax law.
China had temporarily exempted foreign individuals from paying tax on dividend and bonus income from foreign-invested enterprises since 1994 as part of efforts to encourage foreign investment and support the country’s reform and opening-up policies.
The latest measure effectively brings the longstanding preferential treatment to an end as Beijing moves towards what officials and experts describe as a more uniform tax regime.
Liu Yi, director of the China Center for Public Finance and Taxation at Peking University, said the exemption had played a positive role in attracting foreign capital during an earlier stage of China’s economic development.
However, he said foreign investors increasingly consider broader factors when making investment decisions, including the rule of law, market size and the strength of supporting industrial infrastructure.
The policy change comes as China seeks to place greater emphasis on the overall competitiveness and predictability of its business environment rather than relying primarily on preferential taxation to attract foreign capital.
Li Xuhong, vice president of the Beijing National Accounting Institute, said international experience suggests economies tend to become less dependent on tax incentives to attract foreign investment once they reach a certain stage of development.
Instead, she said, attention increasingly shifts towards creating a stable, sound and fair market environment.
According to Li, removing the exemption would help improve the fairness and consistency of China’s tax system, address potential tax loopholes and contribute to the development of a unified national market.
Li argued that the change would not necessarily increase the effective tax burden faced by foreign individual shareholders, particularly those who are tax residents of jurisdictions operating worldwide income taxation systems.
Major European countries and the United States generally tax residents on income earned globally, including dividend income originating from China, she said.
Under the previous Chinese exemption, foreign individuals who received tax-free dividends in China could still be required to pay tax on that income in their country of tax residence.
Following the removal of the exemption, Chinese individual income tax paid on the dividends could potentially be credited against tax liabilities in the investor’s home jurisdiction, depending on the applicable domestic tax rules and arrangements.
“Therefore, the actual tax burden will not increase,” Li said.
The change represents a significant adjustment to a foreign-investment tax concession dating back to 1994, as China shifts towards greater tax neutrality between domestic and foreign investors while seeking to maintain its attractiveness through market access, industrial capabilities and a more predictable business environment.
