- The government said Tuesday evening that it will impose a 20% individual income tax on dividends paid by foreign-invested enterprises to foreign individuals, ending an exemption that had been in place since 1994.
- The move essentially brings dividend taxes applied to foreigners and locals in line, said analysts.
- Under the new rules, foreign-invested enterprises must withhold the tax when paying dividends and remit it by the 15th of the following month.
- If the tax is not withheld, foreign individuals are required to pay it directly by June 30 of the following year, according to a joint statement from the Ministry of Finance and the State Taxation Administration.
- The previous exemption benefited variable interest entities and red-chip structures, said Zhaopeng Xing, senior China strategist at Australia & New Zealand Banking Group.
- Xing added that the combined annual dividend distributions from the impacted firms are estimated to run into the hundreds of billions of yuan.
- The change is part of Beijing’s widening effort to boost tax revenues and close loopholes.
China has announced a significant tax reform by ending a long-standing exemption on dividends for foreign individuals, now imposing a 20% individual income tax on payouts from foreign-invested enterprises. This policy shift, effective immediately, aims to align tax obligations for foreign and local investors.1
The government stated that the new tax regime will require foreign-invested enterprises to withhold the tax when distributing dividends, remitting it by the 15th of the following month. If not withheld, foreign individuals must pay the tax directly by June 30 of the following year. Zhaopeng Xing, a senior strategist at Australia & New Zealand Banking Group, noted that this change targets aggressive cross-border tax planning and profit repatriation, primarily affecting high-net-worth individuals rather than the broader market.3
The previous exemption, in place since 1994, had allowed some companies to exploit the system by converting to foreign-invested enterprises to benefit from tax-free dividend distributions. Analysts believe that the combined annual dividend distributions from affected firms could reach hundreds of billions of yuan. This reform is part of Beijing's broader strategy to enhance tax revenues and close loopholes that have been exploited in the past.6
“Taxing such income in China helps ensure that income connected to China does not escape the domestic tax base simply by passing through an offshore structure,” Xing added, emphasizing the importance of this policy change in maintaining fiscal integrity.
“The change aligns dividend taxes for foreigners and locals, affecting a broad universe of offshore-registered Chinese businesses with annual distributions in the hundreds of billions of yuan. Analysts say it targets aggressive cross-border tax planning and profit repatriation by high-net-worth individuals, not the broader market.”
The Edge Malaysia
