End of the IIT Exemption on Foreign Individuals' Dividends from FIEs: Policy Evolution, New Rules and Implications

This article is a policy commentary and does not constitute tax advice for any specific taxpayer. Statutory provisions are quoted as full sentences and can be verified against the document numbers cited. Chinese legal texts quoted in this article are English translations of the official Chinese originals; in case of any discrepancy, the Chinese originals prevail. 

I. Policy Evolution

The origin of the dividend exemption for foreign individuals can be traced to 1993. On 21 July 1993, the State Administration of Taxation (STA) issued Circular Guoshuifa [1993] No. 45 on the income tax treatment of gains from the transfer of shares (equity) and dividends derived by foreign-invested enterprises (FIEs), foreign enterprises and foreign individuals. The circular provided that dividends and bonuses received by foreign individuals from Sino-foreign equity joint ventures were exempt from income tax, and that dividends and bonuses received by foreign individuals holding B-shares or overseas shares (including H-shares), issued by the domestic enterprise that issued such shares, were temporarily exempt from income tax. The circular was repealed in full with effect from 4 January 2011 by STA Announcement [2011] No. 2 (Catalogue of Tax Regulatory Documents Repealed in Full or in Part). Thereafter, the treatment of dividends and bonuses received by overseas individuals from domestic non-FIE enterprises (such as H-share companies) was governed by Circular Guoshuihan [2011] No. 348 and related documents under the "interests, dividends and bonuses" category.

The general exemption that shaped the following three decades was Article 2(8) of Circular Caishuizi [1994] No. 20 (Several Policy Issues on Individual Income Tax, jointly issued by the Ministry of Finance and the STA): dividends and bonuses derived by foreign individuals from FIEs were temporarily exempt from individual income tax (IIT).

The intention to cancel this preference is not new. In February 2013, Circular Guofa [2013] No. 6 — the State Council's circular transmitting the Opinions of the National Development and Reform Commission and other departments on Deepening the Reform of the Income Distribution System — stated, under the item "14. Strengthening IIT adjustments", that "tax preferences, such as the exemption of individual income tax on dividends and bonuses derived by foreign individuals from foreign-invested enterprises, shall be cancelled". That document, however, was a State Council reform opinion rather than an enforceable tax rule. Over the following decade, some local tax authorities issued implementing documents (for example, Hubei Local Taxation Bureau Announcement [2013] No. 1), while in most regions the 1994 exemption continued to apply, resulting in divergent local practices. In 2018, MOF–STA Announcement [2018] No. 177 (Catalogue of IIT Preferential Policies That Remain in Effect) still listed Circular Caishuizi [1994] No. 20 as remaining in effect. This state of affairs persisted until 1 September 2026.

On 1 September 2026, the Ministry of Finance and the STA issued the Announcement on Individual Income Tax Policy Concerning Dividends and Bonuses of Foreign Individuals (MOF–STA Announcement [2026] No. 27, "Announcement No. 27"), repealing Article 2(8) of Circular Caishuizi [1994] No. 20. Thirteen years after the cancellation was first written into a State Council document, an incentive that had lasted more than three decades formally exited the statute book.

II. Key Content and Compliance Mechanism of the New Rules

Announcement No. 27 contains three articles and took effect on the date of issuance:

1. Dividends and bonuses derived by foreign individuals from FIEs shall be subject to individual income tax under the "interests, dividends and bonuses" category, at a rate of 20%.
2. Where an FIE pays dividends or bonuses to a foreign individual, it shall withhold the tax and file the payment with the competent tax authority by the 15th day of the month following the payment. Where the FIE has not withheld the tax, the foreign individual receiving the dividends or bonuses shall pay the tax before 30 June of the year following the year in which the income is derived; where the tax authority has notified the individual to pay within a prescribed period, the individual shall pay within that period.
3. This Announcement shall take effect from 1 September 2026, and Article 2(8) of Circular Caishuizi [1994] No. 20 (Several Policy Issues on Individual Income Tax, Ministry of Finance/State Taxation Administration) is simultaneously repealed.

The repealed provision, Article 2(8) of Circular Caishuizi [1994] No. 20, reads: "(8) Dividends and bonuses derived by foreign individuals from foreign-invested enterprises" — listed under Article 2 as income "temporarily exempt from individual income tax". As recently as May 2026, one month before the repeal, the Guangdong 12366 tax service hotline was still confirming in a public reply that this provision remained in effect.

A comparison of the old and new regimes:

Mechanically, the new rules align the withholding obligation of FIEs paying dividends to foreign individuals with that of domestic enterprises paying dividends to domestic individuals: the enterprise withholds and files by the 15th day of the following month; where no withholding occurred, the taxpayer's own filing obligation falls due by 30 June of the following year. The Announcement contains no transitional arrangement for any legacy matter

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III. Tax Burden Implications for Foreign Individual Shareholders

The statutory rate is now a uniform 20%, but the actual burden on any given foreign individual depends on the tax rules of the country of residence. The situations need to be distinguished.

For tax residents of major jurisdictions that tax worldwide income with a foreign tax credit (such as the United States, the United Kingdom, Japan and Germany), the actual burden is broadly unchanged. According to the position stated by official experts in interviews with CCTV News and People's Daily: residents are taxed by their residence country on worldwide income, so dividends exempt in China were in any event taxable on remittance to the residence country; now that China taxes the income, the Chinese tax is creditable against the residence-country liability, and "the actual tax burden does not increase". What changes is not the taxpayer's final burden but the allocation of the tax between the source country and the residence country — the taxing right previously ceded by the source country reverts to the source country. The official experts also gave a worked example: for RMB 1 million of dividend income derived in China in 2025, RMB 200,000 of IIT is payable at 20%, and that RMB 200,000 is creditable in the residence-country settlement.

A genuine tax increase falls mainly on individuals whose residence country does not tax foreign dividends (territorial systems) or whose credit is limited: their previous aggregate burden was zero or low, and the 20% levied in China now becomes a real cost.

A second distinction concerns Chinese tax residence. A substantial number of foreign individuals live in China long term and are Chinese tax residents under Article 1 of the Individual Income Tax Law; they were in any event required to pay Chinese tax on this dividend as part of their worldwide income, and the de facto exemption they enjoyed under the "temporary exemption" ends with the repeal. Foreign individuals who are not Chinese tax residents may still claim treaty rates on dividends if they qualify as residents of the other contracting state and obtain a certificate of tax residence. Under Article 10 of the Mainland–Hong Kong Arrangement, the rate for individuals is 10% ("other cases"; the 5% band is expressly limited to companies directly holding at least 25% of the payer's capital and is not available to individuals), and some treaties grant individuals 5% or 7% subject to conditions. Procedurally, claims are made under the Measures for the Administration of Non-resident Taxpayers' Enjoyment of Treaty Treatment (STA Announcement [2019] No. 35) by self-assessment with documents retained for inspection. An individual who is a resident of the other contracting state falls within the "safe harbour" of Article 4(3) of STA Announcement [2018] No. 9 (beneficial ownership) and is directly recognised without a negative-factors analysis.

IV. Implications for Shareholding Structures

While the exemption was in force, direct individual shareholding enjoyed treatment unavailable through any other holding vehicle: domestic individual shareholders paid 20% on dividends, overseas corporate shareholders paid 10% withholding tax (or the treaty rate), and foreign individual shareholders paid nothing. This was an institutional tilt toward direct individual shareholding, and it produced arrangements designed to capture the exemption — the official interpretation expressly named the abuse: "in the course of implementation, some domestic enterprises first converted into foreign-invested enterprises and then distributed large-scale dividends to transfer assets and enjoy the exemption" (Economic Daily, September 2026). Announcement No. 27 closes this channel.

For existing structures, the implications concentrate in three areas.

First, the comparison between direct and indirect holding must be re-run. "Direct individual shareholding is exempt" was the default starting point of cross-border holding design; from now on direct individual shareholding bears 20%, while holding through an offshore intermediate company bears 10% or the treaty rate — the comparison has inverted. Red-chip structures and offshore trusts, under which individuals hold domestic interests through overseas entities, need their dividend repatriation legs re-modelled under the new rules.

Second, restructuring itself carries tax cost. Transferring domestic equity to an offshore company at par or at a low price constitutes a taxable transfer of equity. Under Articles 11 and 14 of the Administrative Measures for Individual Income Tax on Equity Transfer (STA Announcement [2014] No. 67), the tax authority may deem the transfer income using the net-asset method where the declared price is evidently low without reasonable justification; the spread between book net assets and the original cost of the equity, multiplied by 20%, is the direct cost of the restructuring step. In addition, Article 8 of the Individual Income Tax Law empowers the tax authority to make adjustments in respect of arrangements without reasonable commercial purpose; the statutory consequence is recovery of the tax together with interest charged in accordance with law.

Third, the conditions for treaty relief have not relaxed. The premise for treaty dividend rates has always been genuine tax residence in the other contracting state. An identity acquired in haste after the Announcement was issued, or an arrangement that fails the holding-period requirement of Article 5 of Announcement No. 9 (the required shareholding percentage must be met at any time during the 12 months preceding the dividend), is unlikely to survive subsequent review.

V. The Open Question of Pre-Existing Retained Earnings

The Announcement does not address how undistributed profits formed before 1 September 2026 are to be treated. This is the most significant technical gap in the adjustment.

There is precedent for a different approach. When the two enterprise income tax regimes were merged in 2008, Article 4 of Circular Caishui [2008] No. 1 provided: "accumulated undistributed profits formed by FIEs before 1 January 2008 and distributed to foreign investors in or after 2008 shall be exempt from enterprise income tax; profits newly generated by FIEs in and after 2008 and distributed to foreign investors shall be taxed in accordance with law." Grandfathering existing profits and taxing new ones allowed that reform to land smoothly. Announcement No. 27 does not follow this path.

Moreover, Article 2 of the Announcement anchors the withholding obligation at the point of payment, which is inconsistent with the enterprise income tax rule that dividend income is recognised on the date of the profit-distribution resolution (Implementation Regulations of the Enterprise Income Tax Law, Article 17; Circular Guoshuihan [2010] No. 79, Article 4). The mismatch leaves a practical question: where dividends were resolved by a shareholders' meeting before 1 September 2026 but not yet paid to the foreign individual, are they exempt or subject to withholding? Both readings have textual support, and as of the date of writing no official position exists. FIEs carrying substantial declared-but-unpaid dividends on their books are advised to consult the competent in-charge tax authority on the specific transaction before the position is clarified, rather than structure large payment timings on a unilateral reading.

VI. Policy Context and Outlook

The official interpretation released through central media on the day of issuance places the adjustment within the framework of "building a unified national market" and "regulating tax incentives". The stated reasons include: the non-uniform treatment of dividends for domestic and foreign individuals meant identical investment income bore different tax, which no longer suits current conditions; repealing the preference accords with the spirit of the Individual Income Tax Law, helps maintain a fair tax system, and blocks the loophole of obtaining the exemption by changing enterprise nature. Foreign investors' decisions now turn on market size, industrial systems and the overall business environment rather than tax relief, and that the withdrawal of this exemption will have limited impact on inbound investment.

Seen on a longer horizon, the adjustment continues an existing trajectory: the 2008 unification of the enterprise income tax, which ended the FIE-specific preferences; the 2019 reform introducing combined individual income taxation; the clean-up of non-compliant tax incentives since 2021; and now, in 2026, the repeal of one of the last differences in individual tax treatment between domestic and foreign persons. Preferences labelled "temporary" are policies without a committed horizon, and their withdrawal does not await taxpayers' expectations. For subjects still relying on similar "temporary" arrangements, the lesson of this case is that the distance between the proposal written into a document and its implementation can span thirteen years — but the direction does not change.

Concluding Remarks

The IIT exemption on dividends and bonuses of foreign individuals was established in 1994, targeted for cancellation in 2013, and repealed in 2026 — a span of more than three decades. For residents of most treaty jurisdictions that tax worldwide income with a credit, the practical tax effect of the adjustment is limited; what has been adjusted is the allocation of taxing rights between the source country and the residence country, and the treatment gap between domestic and foreign individuals. What warrants continued attention is the compliance treatment of pre-existing retained profits and the interface between treaty relief and the new withholding obligation — matters that remain to be clarified by the tax authorities.

Matters on which no official position exists (as of 7 September 2026): (i) the treatment of dividends resolved before 1 September 2026 but not yet paid; (ii) the filing interface between treaty relief and the withholding obligation under Announcement No. 27. Please follow the position of the competent in-charge tax authority.

Legal Basis Cited in This Article

1. Announcement of the Ministry of Finance and the State Taxation Administration on Individual Income Tax Policy Concerning Dividends and Bonuses of Foreign Individuals (MOF–STA Announcement [2026] No. 27) — STA Zhejiang Bureau republication page

2. Circular Caishuizi [1994] No. 20, Article 2(8) — the current text on the 12366 tax service platform is annotated as repealed with effect from 1 September 2026

3. Circular Guoshuifa [1993] No. 45 — STA Shanghai Bureau website, repealed in full by STA Announcement [2011] No. 2

4. Circular Guofa [2013] No. 6 — item "14. Strengthening IIT adjustments"

5. MOF–STA Announcement [2018] No. 177 (Catalogue of IIT Preferential Policies That Remain in Effect)

6. Individual Income Tax Law of the PRC, Article 1 (residence), Article 3(3) (20% rate for interests, dividends and bonuses), Article 8 (general anti-avoidance)

7. Mainland and Hong Kong Special Administrative Region Arrangement for the Avoidance of Double Taxation, Article 10

8. STA Announcement [2018] No. 9 (beneficial ownership), Articles 4 and 5

9. STA Announcement [2019] No. 35 (administration of non-resident taxpayers' enjoyment of treaty treatment)

10. STA Announcement [2014] No. 67 (equity transfer), Articles 11 and 14

11. Circular Caishui [2008] No. 1, Article 4

12. Implementation Regulations of the Enterprise Income Tax Law, Article 17; Circular Guoshuihan [2010] No. 79, Article 4

This article is a policy commentary and does not constitute tax or investment advice for any specific taxpayer. Please consult a professional adviser on individual cases.