Starting September 1, 2026, foreign individuals receiving dividends from Chinese foreign-invested enterprises face a new 20% individual income tax, ending a 32-year exemption. Withholding applies; no transition period. Foreign tax credits may offset burden.
Tags:Source: OT-Team(G), 财联社，三湘都市报
On September 1, 2026, the Ministry of Finance and the State Taxation Administration jointly issued Announcement 2026 No. 27, confirming that dividends received by foreign individuals from foreign-invested enterprises (FIEs) in China are now subject to 20% individual income tax. This ends a 32-year tax exemption that had been in place since 1994. The new rule takes effect immediately with no transitional period.
Starting September 1, a policy that has been in effect for more than three decades—exempting foreign individuals from individual income tax on dividends and bonuses received from foreign-invested enterprises—officially comes to an end. China's Ministry of Finance and the State Taxation Administration jointly issued a notice clarifying that such income will now be uniformly included in the scope of individual income tax, subject to a 20% rate.
The notice requires foreign-invested enterprises to fulfill withholding and remittance obligations when paying dividends and bonuses to foreign individuals, and to file tax returns within 15 days after the month in which the payment is made. If an enterprise fails to withhold tax, the foreign individual receiving the dividend or bonus must proactively pay the tax by June 30 of the year following the year in which the income is obtained. If tax authorities issue a notice requiring payment within a specified period, the payment must be completed by that deadline.
This adjustment repeals Item (8), Article 2 of the "Notice of the Ministry of Finance and the State Administration of Taxation on Several Policy Issues Concerning Individual Income Tax" (Caishuizi [1994] No. 20). Since 1994, that provision had granted a temporary exemption on dividends and bonuses received by foreign individuals from foreign-invested enterprises, originally designed to support China's reform and opening-up and attract foreign capital.
It should be noted that this adjustment applies only to dividend and bonus income and does not affect another common tax benefit for foreign individuals—the tax-free allowance policy covering seven categories including housing subsidies, children's education expenses, and language training fees. According to Ministry of Finance and State Taxation Administration Announcement No. 29 of 2023, foreign individuals who qualify as resident individuals may choose between "special additional deductions" and "tax-free allowances" under a transitional arrangement extended through December 31, 2027. The two options cannot be enjoyed simultaneously, and the choice cannot be changed within a tax year.
The rationale behind the policy shift
Li Xuhong, vice president of the Beijing National Accounting Institute, pointed out that from the perspective of tax fairness, when investors receive dividend distributions from an invested enterprise, it is clearly inequitable if foreign investors are exempt from tax while Chinese investors must pay.
Industry analysts note that in the early days of reform and opening-up, this tax exemption played a positive role in attracting foreign capital, but loopholes emerged during implementation. Some enterprises converted into foreign-invested enterprises and then distributed large-scale dividends to transfer assets, exploiting the exemption and distorting the policy's original intent.
On the other hand, as China continues to build a high-standard socialist market economy, foreign investors entering China are increasingly focused on the overall business environment—rule of law, market size, industrial supporting capacity, and so on. Continuing to rely on unbalanced tax policies between domestic and foreign capital to attract investment is no longer compatible with the current situation and new requirements. A Xinhua News Agency report cited Liu Yi, director of the China Center for Public Finance and Taxation Research at Peking University, who concluded that relying solely on tax incentives at this stage is no longer appropriate.
Impact on effective tax burden
Experts say that major economies in Europe and the United States implement worldwide income taxation for resident individuals. When foreign individual shareholders receive dividend and bonus income from foreign-invested enterprises in China, even if they previously enjoyed a tax exemption in China, they still needed to pay the corresponding tax to their home country. After the exemption is removed, the individual income tax paid by foreign individuals in China can be credited against their home-country tax liabilities, so the effective tax burden will not increase significantly.
This policy adjustment is also part of the effort to build a unified national market. As various special tax incentives are gradually cleaned up and standardized, domestic and foreign enterprises will stand on an equal footing at the tax-system level, helping to close tax loopholes and better leverage the income-redistribution function of taxation.
A comparison with the tax burden on other types of shareholders makes the specific changes clearer:
As can be seen, this adjustment narrows the tax-burden gap between "foreign individual shareholders" and "Chinese individual shareholders." The 10% withholding tax applicable to foreign corporate shareholders is a separate system parallel to individual income tax and falls outside the scope of this notice.
Policy evolution timeline
The notice takes effect on September 1, 2026, with document number Ministry of Finance and State Taxation Administration Announcement No. 27 of 2026.
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