Mainland China ends the 30-year dividend tax exemption for foreign individuals

Context

For more than three decades, foreign individuals who owned shares in mainland Chinese companies established with foreign investment enjoyed a notable benefit: dividends were exempt from individual income tax. The exemption came from a 1994 notice (Caishuizi [1994] No. 20) that granted several temporary tax concessions to attract foreign capital in the early years of reform and opening up.

Chinese residents receiving dividends have long paid 20%. Over time, the gap between domestic and foreign shareholders became harder to justify, and as China's appeal to investors increasingly rests on market size, supply chains and the business environment, the case for the concession weakened.

What changed

On 1 September 2026, the Ministry of Finance and the State Taxation Administration (STA) issued Announcement No. 27 of 2026. From that date, dividends and bonuses that foreign individuals receive from foreign-invested enterprises are subject to individual income tax at 20% under the category of "interest, dividends and bonuses". The announcement repeals the relevant item of the 1994 notice.

Mechanically, the FIE paying the dividend must act as withholding agent and file and pay the tax by the 15th of the following month. If tax is not withheld, the foreign individual must file and pay by 30 June of the year following the year of receipt.

Xinhua quoted Liu Yi, director of the China Center for Fiscal and Taxation Research at Peking University, saying that the exemption had played a positive role in attracting foreign capital, but that continuing to rely on unequal tax treatment between domestic and foreign investors no longer suited new conditions. Li Xuhong, vice president of the Beijing National Accounting Institute, said the adjustment would help maintain fairness in the tax system and close loopholes.

Both argued that the change would not raise effective burdens for most foreign shareholders. Many home countries tax residents on worldwide income, so a dividend exempt in China was previously taxed in full at home. Once Chinese tax is paid, it can generally be credited against home-country tax.

The Hong Kong angle

The announcement refers to foreign individuals. How it applies to Hong Kong, Macau and Taiwan residents, who have often been treated in the same way as foreign individuals under past practice, should be confirmed for each case. Where it does apply, the reasoning above works best for residents of countries with worldwide taxation and foreign tax credits. Hong Kong does not fit that pattern. It does not tax dividends, whether from Hong Kong or overseas. For a Hong Kong resident individual receiving dividends from a mainland FIE, any mainland tax is likely to be a real additional cost, with no home-country tax against which to credit it.

The Arrangement between the mainland and Hong Kong for the avoidance of double taxation generally limits mainland tax on dividends paid to a Hong Kong resident beneficial owner to 10%, or 5% for a company holding at least 25% of the payer. Claiming those rates requires meeting the arrangement's conditions, including beneficial ownership, and following the procedures for treaty benefits.

Many foreign individuals do not hold FIE shares directly. They hold them through Hong Kong or offshore holding companies. In that case, the dividend paid to the holding company is not personal income and is governed by enterprise income tax rules on dividends to non-resident companies, not by this announcement. The question then becomes when and how profits reach the individual.

Implications for investors, families and businesses

For foreign individuals holding FIE shares directly, the immediate task is to confirm the withholding position on any dividends declared after 1 September, and to check home-country foreign tax credit rules.

For Hong Kong families that own mainland businesses directly in personal names, the change may prompt a review of holding structures. Any restructuring should be approached cautiously: transferring shares can trigger its own taxes, and anti-avoidance rules on beneficial ownership apply.

For FIEs, finance teams need to update dividend procedures to withhold and file correctly. Dividends declared before 1 September but paid later may raise timing questions that should be confirmed with local tax authorities.

For investors more broadly, the change is another sign that China is aligning tax treatment of domestic and foreign capital, alongside its stronger enforcement on residents' overseas income.

Questions to consider

• Do we hold shares in mainland FIEs directly as individuals, and in which country are we tax resident?
• Can we claim a lower rate under the mainland-Hong Kong arrangement or another treaty, and do we meet the conditions?
• Will our home country give a credit for the mainland tax?
• Is our current holding structure still appropriate, and what would it cost to change it?
• Have our FIEs updated their dividend withholding procedures?

Closing

The end of the dividend exemption is a small change in China's tax system but a meaningful one for foreign and Hong Kong individuals who hold mainland companies directly. For many, the net effect will depend on residence and treaty position rather than on the headline rate. Now is a good time to check both.