China has ended its longstanding dividend tax exemption for expatriates working at foreign-funded enterprises, instituting a 20 percent tax rate effective immediately. This change, announced jointly by the Ministry of Finance and the State Taxation Administration on Tuesday, targets income derived from interest, dividends, and bonuses for the purposes of individual income taxation.

The exemption, originally implemented in 1994 to attract foreign investment and encourage economic reform and opening-up, allowed foreign individuals receiving dividends from foreign-invested enterprises to avoid taxation on those earnings. The recent policy reversal aims to create a more unified and equitable tax system, eliminating previously uneven treatment between foreign and Chinese investors.

Officials from China’s tax authority have yet to clarify whether the new tax rules will apply to individuals residing in Hong Kong, Macau, Taiwan, or foreign nationals living overseas. A tax service representative indicated that further details regarding these specifics are not immediately available.

Experts in the field view the revision as a step toward enhancing tax fairness. Fu Yifu, a special research fellow at Su Merchants Bank in Nanjing, noted that the prior exemption granted to foreign investors, while Chinese investors remained taxable on similar income, conflicted with the principle of tax neutrality. Fu added that foreign investors are attracted to China’s market not solely because of tax incentives but due to its legal framework, market scale, and industrial support. Removing residual preferential policies, he suggested, will encourage a more efficient and regulated market environment.

The adjustment forms part of a broader regulatory push by Beijing to tighten control over cross-border financial transactions. In July, authorities closed a tax loophole that had allowed wealthy Chinese individuals to avoid personal income taxes through offshore trusts, bringing such income under domestic tax regulations. These moves also address issues where some domestic companies rebranded as foreign-invested enterprises to exploit exemptions on dividends, which led to significant tax revenue losses. The new regulations aim to eliminate such arbitrage opportunities.

Under the revised guidelines, foreign-funded enterprises are required to withhold and remit taxes when distributing dividends and bonuses to foreign individuals. These enterprises must file the relevant tax declarations within 15 days following the month of payment. Should an enterprise fail to withhold the appropriate tax, recipients will be responsible for remitting it themselves by June 30 of the subsequent year.

Fu pointed out that if the foreign individual’s country of tax residence permits tax credits, the taxes paid in China may be deductible from their home country tax liabilities, potentially mitigating any increase in overall tax burdens.