Chinese authorities on Tuesday scrapped a long-standing tax exemption on dividends and bonuses earned by foreign individuals from foreign-invested enterprises in China.
Effective immediately, these foreign investors will be subject to personal income tax at a rate of 20 percent, bringing them in line with Chinese investors under the country's individual income tax law.
Exemptions from dividend and bonus taxes, first introduced in 1994, were designed to encourage foreign investment and support China's opening-up policy. However, authorities found that the policy had been exploited by some companies, which would restructure themselves as foreign-invested firms to channel large dividend payouts and sidestep tax liabilities for their investors.
Li Xuhong, vice president of the Beijing National Accounting Institute, said the policy change addresses a fundamental issue of fairness.
"From the perspective of tax fairness, it is clearly unfair that foreign investors receive tax exemptions on dividends and bonuses while Chinese investors do not, even though both are investing in the same enterprise," she said.
The adjustment also reflects China's evolving approach to attracting foreign investment. As the country continues to build a high-standard socialist market economy, foreign investors are increasingly drawn to the overall business environment, including the market's rule of law, market scale, and industrial ecosystems, rather than isolated tax incentives. Keeping tax policies that favor foreign investors over domestic ones is no longer aligned with current economic conditions and development goals, experts say.
Experts also noted that the policy change will not necessarily increase the real tax burden on foreign individuals. Many major Western economies tax their residents on worldwide income. Under these systems, if foreign individuals had previously enjoyed tax exemptions in China, they would still be required to pay the difference to their home countries. Now taxes levied in China can be claimed as foreign tax credits, offsetting their domestic tax liabilities on the same income.
"The current 20-percent tax rate on dividend, bonus and interest income is considered reasonable. As China's investment climate continues to improve, investors are placing greater emphasis on access to value-creating opportunities rather than on preferential tax treatment alone," Li said.
China to tax foreign individuals' dividends from foreign-invested enterprises
