By MHP LAW FIRM – Kevin Xu, Jill Pan
China’s Ministry of Finance and the State Taxation Administration jointly issued an announcement (the “Announcement”) on September 1, scrapping the long‑standing individual income‑tax exemption for dividend income that foreign individuals receive from foreign‑invested enterprises, effective immediately.
According to the Announcement, dividends obtained by foreign individuals from foreign‑invested enterprises will be taxed under the category of “interest, dividends and bonus income” at a rate of 20%. Foreign-invested enterprises must withhold and remit taxes, filing within 15 days after the month of payment; if no withholding occurs, foreign individuals must self-report and pay by June 30 of the following year.
Under China’s Individual Income Tax Law, individuals have long been required to pay individual income tax on dividend and bonus income at a rate of 20%. To encourage reform and opening-up and attract foreign investment, China had granted a temporary exemption on such income for foreign individuals since 1994.
Although the tax exemption was now repealed, the actual tax burden for foreign individual shareholders of foreign-invested companies will not increase, according to Li Xuhong, the vice president of the Beijing National Accounting Institute. She explained that major European and American countries generally apply a worldwide income taxation system, meaning they tax their residents on income from all sources, including dividends from China. Under the previous exemption, a foreign individual who received tax-free dividends in China would still have to pay the equivalent tax to their country of residence, resulting in no real tax reduction. “With the exemption lifted, the individual income tax paid in China can be credited against their home-country tax liability. Therefore, the actual tax burden will not increase.” she explained.
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