Starting September 1st, a joint announcement from the Ministry of Finance and the State Taxation Administration will revoke the personal income tax exemption previously applied to dividend income received by foreign individuals from foreign-invested enterprises.

Following this policy shift, such income will now be subject to personal income tax under the "interest, dividends, and bonuses" category at a standard rate of 20%, in accordance with China's individual income tax law.

The exemption, originally established in 1994, was designed to attract foreign capital during the early stages of China's reform and opening-up. However, it has been exploited by some companies that restructured themselves as foreign-invested enterprises to channel large dividend payments abroad and take advantage of the tax break.

Li Xuhong, a vice president at the Beijing National Accounting Institute, noted that the change is a matter of tax fairness. In her view, it was inequitable for foreign investors to receive dividends tax-free from a domestic enterprise while their Chinese counterparts were liable for tax on the same type of income.

As China builds a more robust socialist market economy, foreign investors are increasingly drawn to factors like the rule of law, market scale, and the completeness of the industrial supply chain. The previous reliance on a tax system that favored foreign investors is now out of step with the country's evolving economic priorities.

Experts point out that major Western economies generally tax their residents on worldwide income. This means that foreign shareholders in Chinese ventures, even when granted a tax exemption in China, were often expected to pay the difference back in their home countries. By eliminating the exemption, foreign individuals can now use the taxes paid in China as a credit against their home-country tax obligations, effectively preventing any increase in their overall tax burden.