China to tax foreign individuals' dividends from foreign-invested enterprises

BEIJING -- China will impose a 20 percent individual income tax on dividends and bonuses that foreign individuals receive from foreign-invested enterprises starting Sept 1, according to a joint announcement from the Ministry of Finance and the State Taxation Administration.

Under China's individual income tax law, individuals have long been required to pay a 20 percent tax on dividend and bonus income. To encourage reform and opening-up and attract foreign investment, China has granted a temporary exemption on such income for foreign individuals since 1994.

The tax waiver, which has been in place for over three decades, played a positive role in attracting foreign capital during a specific phase of development, said Liu Yi, director of the China Center for Public Finance and Taxation at Peking University.

However, as China accelerates the building of a high-standard socialist market economy, foreign investors now pay more attention to the overall business environment, including the rule of law, market scale and industrial supporting facilities, Liu added.

Drawing on international experience, Li Xuhong, vice president of the Beijing National Accounting Institute, noted that when an economy reaches a certain stage of development, it generally no longer depends on tax incentives to draw foreign investment, but instead focuses on creating a stable, sound and fair market environment.

The move is conducive to maintaining fairness and uniformity of the tax system, fostering a healthier environment for foreign investment, plugging tax loopholes and advancing the construction of a unified national market, she added.

The actual tax burden for foreign individual shareholders of foreign-invested companies will not increase, Li noted.

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."