China has ended a tax exemption on dividends and bonuses received by foreign individuals from Foreign-Invested Enterprises (FIEs), marking a significant change to the taxation of foreign individual shareholders in China.
Under a joint announcement issued by the Ministry of Finance and the State Taxation Administration, foreign individuals receiving dividends or bonuses from FIEs are now subject to Individual Income Tax (IIT) at a rate of 20%. The new rules took effect on 1 September 2026, ending an exemption that had been in place since 1994.
For foreign entrepreneurs and investors with interests in Chinese companies, the change has immediate implications for dividend planning, withholding procedures and cross-border tax compliance.
China's Individual Income Tax rules already provide for a 20% rate on income classified as interest, dividends and bonuses. However, since 1994, foreign individuals receiving dividends and bonuses from FIEs had benefited from a specific exemption under Cai Shui Zi [1994] No. 20.
Announcement No. 27/2026 repeals this exemption. As a result, from 1 September 2026, dividends and bonuses paid by an FIE to a foreign individual are generally subject to 20% IIT. The tax is classified as income from interest, dividends and bonuses.
For example, if a foreign individual receives RMB 1 million in dividends and no treaty relief or other applicable reduction is available, RMB 200,000 would be subject to IIT, leaving RMB 800,000 after Chinese tax.
The change concerns foreign individual shareholders. The 10% withholding tax regime generally applicable to dividends paid by Chinese companies to foreign corporate shareholders is separate and is not changed by this specific announcement.
The exemption was introduced during China's early reform and opening-up period, when preferential tax treatment was used to encourage foreign investment.
More than 30 years later, the Chinese authorities have indicated that the policy no longer reflects the country's current economic and tax environment.
The change is broadly linked to four considerations:
The new rules place the primary withholding responsibility on the Chinese FIE making the dividend payment.
When an FIE pays dividends or bonuses to a foreign individual, it must:
If the FIE fails to withhold the tax, the foreign individual becomes responsible for paying the tax. In that situation, the tax must generally be paid by 30 June of the following year, unless the tax authorities issue a different payment deadline.
This represents an important operational change for FIEs that have historically paid dividends to foreign individual shareholders without withholding IIT. Finance and accounting teams should review their dividend payment procedures and ensure that the appropriate withholding and reporting mechanisms are in place.
Potentially. Foreign individuals who are tax residents of a jurisdiction that has a Double Taxation Agreement (DTA) with China may be entitled to a lower withholding rate, depending on the relevant treaty and the individual's circumstances.
For example, the China–Italy DTA may allow a reduced rate of 10% for qualifying dividend income, subject to the applicable treaty conditions and documentation requirements.
Treaty relief should not, however, be assumed automatically. The applicable treaty must be reviewed on a case-by-case basis, including requirements relating to tax residence and beneficial ownership. Appropriate supporting documentation, such as a tax residency certificate, may also be required.
Foreign shareholders should therefore assess their treaty position before a dividend is paid, rather than treating treaty relief as an automatic reduction to the 20% domestic rate.
The immediate impact is a reduction in the amount of dividend income received by foreign individual shareholders where no treaty relief applies. However, the overall tax impact will depend on the shareholder's personal tax position and country of residence.
For individuals who are tax resident in a jurisdiction that taxes worldwide income, Chinese IIT paid on the dividend may potentially be available as a foreign tax credit against tax due in the shareholder's home jurisdiction, subject to local rules.
This means that the introduction of Chinese withholding tax does not necessarily translate into an equivalent increase in the shareholder's overall global tax burden. The outcome needs to be assessed across both jurisdictions.
For foreign entrepreneurs with Chinese operating companies, the change therefore warrants a cross-border review rather than simply treating the new 20% rate as an additional cost.
The new rules are already in effect, so businesses and shareholders should review their position without delay.
1. Review upcoming dividend distributions
Companies with planned dividend distributions should assess the tax implications before making payments to foreign individual shareholders.
The key point is to determine whether the payment falls under the new rules and whether any DTA or other applicable relief is available.
2. Update withholding procedures
FIEs should review their accounting, tax and dividend payment processes to ensure that IIT is correctly calculated, withheld and reported.
This may require updates to internal tax workflows, payment instructions and coordination between finance, accounting and external tax advisers.
3. Check eligibility for treaty relief
Foreign individual shareholders should establish whether their country of tax residence has a DTA with China and whether the treaty provides a reduced rate on dividends.
Where treaty relief is available, the required documentation should be prepared and retained to support the position taken.
4. Review the shareholder's home-country tax position
The Chinese tax treatment should be considered together with the individual's tax obligations in their country of residence.
Foreign tax credit rules, reporting obligations and the interaction between Chinese IIT and home-country taxation can materially affect the final outcome.
5. Maintain appropriate documentation
FIEs and shareholders should retain relevant documentation supporting the dividend distribution and tax treatment, including shareholder information, dividend resolutions, payment records and, where relevant, tax residency documentation and evidence supporting treaty benefits.
Good documentation will be particularly important if the tax treatment is subsequently reviewed by the Chinese tax authorities.
The end of the dividend exemption is more than an isolated change to the taxation of foreign shareholders. It illustrates a broader evolution in China's approach to foreign investment.
For many years, preferential tax treatment played an important role in attracting international businesses and capital. As China's market has matured, the authorities are increasingly focusing on a more consistent tax framework and on competing for investment through the scale of the market and the broader business environment.
For international businesses, this makes tax-efficient structuring and regular reviews of cross-border arrangements increasingly important. Ownership structures, dividend policies, treaty positions and the tax treatment in both China and the shareholder's home jurisdiction should be considered together.
Fidinam advises international businesses and private clients on China tax, cross-border structuring and international tax compliance.
Our teams in China and across Asia can help foreign shareholders and FIEs assess the impact of the new dividend rules, review applicable tax treaty benefits, update withholding and compliance procedures, and consider the wider tax implications in the shareholder's country of residence.
If your business or investment structure includes Chinese companies with foreign individual shareholders, we can help you assess the changes and determine the appropriate next steps.
Contact us at info@fidinamgw.com or via the form below.