China’s Ministry of Finance (MOF) and State Taxation Administration (STA) have issued Announcement No. 27 of 2026, ending the long-standing individual income tax exemption on dividends received by foreign individuals from foreign-invested enterprises (FIEs).
What has changed
Under China’s Individual Income Tax Law, dividend income is generally subject to a 20% individual income tax (IIT) rate. However, foreign individuals receiving dividends from FIEs have benefited from a specific exemption since 1994. The exemption was introduced as part of China’s efforts to support reform and opening up and attract foreign investment.
Announcement No. 27 of 2026 abolishes this exemption. Effective from 1 September 2026, dividends paid by FIEs to foreign individuals are subject to the standard 20% IIT rate under the category of “interest and dividends income”. The change brings the treatment of these payments in line with the general IIT rules for dividend income.
The treatment of individuals in Hong Kong, Macau and Taiwan, as well as foreign individuals living overseas, has not yet been clarified. A tax-service hotline representative indicated that confirmation was not immediately available given the recent issuance of the announcement.
New withholding and filing obligations
The announcement also places clear tax withholding responsibilities on FIEs. When an FIE pays dividends to a foreign individual, it must withhold and remit the applicable IIT when making the payment and file the relevant tax return by the 15th day of the month following the month in which the income is paid.
If the enterprise fails to withhold the tax, the foreign individual receiving the dividend must pay the tax by 30 June of the following year. Where the tax authority issues a specific payment notice, the individual must instead comply with the deadline stated in that notice.
This means the change is not limited to the tax position of foreign shareholders. FIEs will also need to ensure that their dividend payment and tax processes are updated to reflect the new withholding requirements.
Why China is removing the exemption
China’s tax system has moved towards more consistent treatment of domestic and foreign taxpayers. The previous exemption meant that foreign individuals could receive tax-exempt dividends from FIEs while Chinese investors were subject to tax on the same category of income. This created a difference in tax treatment that was inconsistent with the principle of tax neutrality. There were also concerns that some domestic firms could restructure foreign-invested enterprises to access the exemption and distribute profits under the preferential treatment, creating opportunities for tax arbitrage.
Removing the exemption therefore addresses both the unequal treatment and the potential for such arrangements to be used to reduce tax liabilities. It also fits within a broader tightening of China’s approach to cross-border income and tax compliance, including recent rules bringing income from offshore trusts into the individual income tax framework.
Implications for foreign investors and FIEs
Foreign individuals who receive dividends from Chinese FIEs will feel the impact first, as any payment made from 1 September 2026 onward falls under the new 20% IIT requirement.
For FIEs, the main priority is ensuring that dividend distribution procedures, tax withholding and filing processes are aligned with the new rules. Companies that regularly distribute profits to foreign shareholders may also need to review the timing and documentation of future distributions.
The effect on an individual’s overall tax burden will depend on their personal tax residence and the rules applicable in their home jurisdiction. Where a tax residence country allows tax credits, tax paid in China could offset the individual’s local tax liability, subject to the applicable domestic rules and tax treaty provisions, so the overall tax burden may not rise materially.
