China's Ministry of Finance and the State Taxation Administration jointly announced a policy update, effective from September 1st. Under the new rule, foreign individuals receiving dividend income from foreign-invested enterprises in China will no longer be exempt from individual income tax.

Following this adjustment, such dividend income will be subject to taxation under the "interest, dividends, and bonuses" category, as stipulated by China's individual income tax law, with a standard tax rate of 20%. Previously, since 1994, foreign individuals had been exempt from personal income tax on dividends received from foreign-invested enterprises within China. This exemption was originally implemented during the early stages of reform and opening-up to attract foreign investment.

However, it was observed that some companies exploited this policy by restructuring themselves as foreign-invested enterprises to distribute large dividends and transfer assets, thereby taking undue advantage of the tax exemption. Li Xuhong, Vice President of the Beijing National Accounting Institute, noted that the policy created an imbalance in tax fairness. Both foreign and domestic investors receive dividends from the same investee company, yet foreign investors were exempt while Chinese investors were taxed, which was clearly inequitable.

As China advances its high-standard socialist market economy, foreign investors are now more focused on the overall business environment, including the rule of law, market scale, and industrial support. Relying on preferential tax treatment that creates an imbalance between domestic and foreign investment has become incompatible with the current economic context and new requirements. Experts point out that major Western countries generally impose worldwide taxation on their residents' income.

Under the previous exemption policy, foreign individual shareholders of foreign-invested enterprises in China would still have to pay the equivalent tax in their home countries. With this exemption now removed, the individual income tax paid in China can be credited against their home country tax obligations, meaning their overall tax burden will not increase.