September 1, 2026 (InvestinChina.asia) — China has repealed a 32-year-old tax exemption that allowed foreign individuals to receive dividends and bonuses from foreign-invested enterprises (FIEs) without paying personal income tax, the Ministry of Finance (MOF) and the State Taxation Administration (STA) announced on Tuesday.
Under Announcement No. 27 of 2026, released by the two departments on September 1, dividend and bonus income received by foreign individuals from FIEs shall be taxed under the “interest, dividends and bonuses” category of personal income tax at a flat rate of 20%. The provision takes effect immediately, and simultaneously repeals Article 2(8) of the Circular on Certain Policy Issues Concerning Personal Income Tax (Caishuizi [1994] No. 20), which had granted the exemption since May 1994.
Withholding and Filing Mechanics
The new rules bring foreign individuals fully in line with domestic shareholders. When an FIE pays dividends or bonuses to a foreign individual, it must act as the withholding agent, deducting the tax at source and filing the return within 15 days after the month in which the payment is made.
If the enterprise fails to withhold, the foreign individual who receives the dividend must pay the tax by June 30 of the following year. Where the tax authority issues a notice requiring payment within a specified period, the individual must comply accordingly.
A Policy Born of a Different Era
The exemption was introduced in the early stage of China’s reform and opening-up, when preferential tax treatment served as a powerful incentive to attract foreign capital. For more than three decades, it allowed foreign nationals — defined as individuals without Chinese nationality — to collect dividend distributions from FIEs entirely tax-free in China.
Over time, however, the asymmetric treatment came under scrutiny. Li Xuhong, deputy dean of the Beijing National Accounting Institute, noted that the disparity was fundamentally unfair: “When the same investee company distributes dividends, it is obviously inequitable that a foreign investor pays no tax while a Chinese investor must.”
Moreover, authorities observed that some domestic enterprises exploited the loophole — first converting themselves into FIEs, then distributing large-scale dividends to shift assets and capture the tax break, thereby undermining the state’s tax interests and distorting market competition.
A Level Playing Field
The repeal reflects a broader push toward tax parity as China builds a high-standard socialist market economy. Liu Yi, director of the Center for Public Finance at Peking University, observed that the move is part of the country’s ongoing efforts to clean up and standardize tax preferences, helping foster a fairly competitive market environment.
Policymakers emphasized that foreign investment decisions today are driven less by narrow tax differentials and more by the overall business environment — the rule of law, market scale and industrial ecosystems. Continuing to rely on unbalanced tax incentives between domestic and foreign capital, they argued, no longer fits the new reality.
Why the Effective Tax Burden May Not Rise
Crucially for foreign shareholders, the 20% levy in China does not necessarily translate into a heavier global tax load. Most developed economies — particularly in Europe and North America — operate a worldwide taxation system for their residents, meaning foreign individuals were already required to report and top up taxes on their Chinese dividend income back home, even when exempt in China.
With the new rules, the personal income tax paid in China can be credited against the taxpayer’s liability in their home country, so the actual economic burden may remain unchanged. This mechanism aligns China’s treatment with international tax norms and prevents double taxation through foreign tax credit rules.
What FIEs and Foreign Shareholders Should Do
For foreign-funded enterprises, the immediate task is operational: restructuring profit-distribution workflows, building dividend tax-withholding calculations into accounting systems and ensuring timely filing to avoid penalties for non-withholding.
Foreign natural-person shareholders holding direct equity stakes should re-evaluate their ownership structures, examine applicable bilateral tax treaties, and leverage the home-country credit mechanism to manage potential double-taxation exposure. The policy also closes off the arbitrage route previously available to domestic parties who switched identities to access the exemption.
The MOF and STA signaled that the adjustment is a key step in China’s systematic cleanup of tax incentives, advancing tax fairness and protecting the state’s revenue base as the country transitions toward a unified, rules-based fiscal regime.