Starting September 1st, the Ministry of Finance, together with the State Taxation Administration, released a notice detailing the individual income tax policy on dividends and bonuses for foreign individuals.

Effective immediately, dividends and bonuses that foreign individuals receive from foreign-invested enterprises will be subject to a 20% individual income tax. This change marks a significant shift from the long-standing exemption policy implemented in 1994, which was initially designed to attract foreign investment during the early stages of reform and opening up.

As China's socialist market economy has matured, the need to rely on preferential tax policies that create an uneven playing field for domestic and foreign enterprises has diminished. Liu Yi, Director of the China Fiscal Research Center at Peking University, explained that this adjustment is part of a broader effort to create a fairer and more competitive market environment, aligning with the country's goal of building a unified national market and streamlining tax incentive policies.

Contrary to initial concerns, this new policy is not expected to increase the overall tax burden for foreign investors. Li Xuhong, Vice President of the Beijing National Accounting Institute, clarified that under international tax rules, individuals are typically taxed on their global income in their country of residence. This means that even with a tax exemption in China, foreign individuals would still be required to pay taxes on this income in their home country.

By levying this tax, China can claim its rightful tax jurisdiction and prevent revenue leakage. Liu Yi provided a practical example: if a foreign individual earns 1 million yuan in dividends in China in 2025, they would pay 200,000 yuan in Chinese tax. This amount could then be credited against their tax liability in their home country, should they have one, thus avoiding double taxation.

Regarding concerns about the policy's potential to deter foreign investment, Liu Yi believes the impact will be limited. He points to China's robust economic fundamentals, including a GDP expected to surpass 140 trillion yuan by 2025, its vast middle-income population, and a complete industrial chain. Investment decisions are now driven more by these comprehensive factors than by tax incentives alone.

The decision to end the tax exemption also serves to close potential loopholes, preventing investors from exploiting structural advantages through corporate restructuring. This move is seen as supporting the high-quality development of foreign investment and maintaining the integrity of the unified market.

According to the official announcement, foreign-invested enterprises are now required to withhold and remit the tax by the 15th of the month following the payment of dividends. If the enterprise fails to withhold, the foreign individual must pay the tax by June 30th of the following year.