End Of Preferential Treatment: Foreign Individuals’ Dividend Income No Longer Tax-Exempt

On September 1, 2026, the Ministry of Finance and the State Taxation Administration jointly issued the Announcement on Individual Income Tax Policies Concerning Dividends and Profit Distributions Received by Foreign Individuals (Announcement [2026] No. 27 of the Ministry of Finance and the State Taxation Administration, hereinafter referred to as “Announcement No. 27”), introducing significant changes to the individual income tax treatment of dividends and profit distributions received by foreign individuals from foreign invested enterprises (“FIEs”). Announcement No. 27 took effect upon issuance.

I. Key Changes to the Policy

Under Announcement No. 27, from September 1, 2026, dividends received by foreign individuals from FIEs are subject to individual income tax under the category of “income from interest, dividends and profit distributions” at a rate of 20%.

The introduction of Announcement No. 27 also repeals Item (8), Paragraph 2 of the Notice of the Ministry of Finance and the State Taxation Administration on Certain Policy Issues Concerning Individual Income Tax (Cai Shui Zi [1994] No. 20), which had provided an individual income tax exemption for dividends received by foreign individuals from FIEs since 1994.

FIEs paying dividends to foreign individuals are required to withhold and remit the applicable individual income tax and file the tax return by the 15th day of the month following the payment. If the payer fails to fulfill its withholding obligation, the foreign individual receiving the income shall file and pay the tax by June 30 of the following year. If the tax authority specifies a payment deadline, the tax shall be paid within that period.

II. Tax Treaty Benefits Remain Available

Despite the removal of the exemption under Chinese law, eligible non-resident individuals may still claim the reduced tax rate under an applicable tax treaty between China and their country of tax residence.

For example, under the China-Germany tax treaty, dividends derived from China by a German tax resident who is the beneficial owner of the dividends are generally subject to a maximum Chinese tax rate of 10%. Tax residents of other countries should refer to the relevant tax treaty with China to determine whether a reduced treaty rate is available.

Treaty benefits are administered on a “self-assessment, declaration and record-retention” basis and do not require prior approval. Non-resident individuals claiming treaty benefits should retain the required supporting documents, including a tax residency certificate and documents supporting their beneficial owner status, etc, for potential review by the tax authorities.

III. Reinvestment of Profits: No Tax Incentives

The existing tax incentive regulations applicable to the reinvestment of profit distributions from FIEs within China – which provide, among other things, a tax deferral up to the amount reinvested – remain in force. These regulations apply exclusively to foreign or non-resident enterprises, but not to non-resident individuals. Accordingly, the legislation regarding the taxation of foreign non-resident individuals in this context remains unchanged.

Accordingly, where a foreign individual intends to reinvest dividends derived from China, the current tax treatment remains subject to the ordinary procedure, i.e., the applicable tax must first be paid before the after-tax proceeds are reinvested. Such individual is currently unable to benefit from a tax deferral arrangement similar to that available to non-resident enterprises reinvesting their dividends. It remains to be seen whether further policies will be introduced in this area.

IV. Our Recommendations

Foreign individual shareholders of FIEs should assess the availability of treaty benefits based on their respective tax residency status and claim such benefits in connection with dividend distributions, with a view to reducing the overall tax burden. The tax implications of Announcement No. 27 should also be considered in the context of the overall shareholding structure and future dividend distribution arrangements, including whether any adjustment to the existing structure may be appropriate.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.