China's finance ministry and the State Taxation Administration jointly announced on Wednesday that, effective September 1, foreign individuals receiving dividends from foreign-invested enterprises in China will no longer qualify for a personal income tax exemption. Following this adjustment, such income will be subject to a 20% tax rate under the “interest, dividends, and bonuses” category of the country's individual income tax law. The exemption, first introduced in 1994, was initially designed to attract foreign capital during the early stage of China's reform and opening-up. However, authorities have noticed that certain firms have exploited the policy by first converting into foreign-invested entities and then distributing large-scale dividends to shift assets and enjoy the tax break, prompting the need for change.

Li Xuhong, vice president of the Beijing National Accounting Institute, highlighted the issue of fairness in the current tax system. She pointed out that when a domestic investor and a foreign investor both receive dividends from a Chinese business, the current rules effectively favor the foreign shareholder while imposing a tax burden on the local one, an imbalance that is evidently unjust. She further noted that as China builds a high-level socialist market economy, foreign capital is now more drawn to the overall business environment—such as the rule of law, market scale, and industrial support—rather than relying on uneven tax incentives. Continuing such preferential policies, which create disparity between domestic and foreign investors, no longer aligns with the country's current development stage.

According to experts, major Western economies generally impose taxes on their residents' worldwide income. Previously, foreign individual shareholders who benefited from China's exemption on dividend income from local ventures would typically have to pay the difference back to their home country's tax authority. With the removal of the exemption, the personal income tax paid in China can be credited against their home-country tax liabilities, meaning the overall tax burden for these individuals will not increase in practice.