A 32-year-old tax exemption for foreign individuals in China ended this week, a change that could affect foreign founders, entrepreneurs, and shareholders receiving dividends from businesses in China.
Starting September 1—which was yesterday—foreign individuals receiving dividends from foreign-invested enterprises are subject to individual income tax at a standard rate of 20%.
The Ministry of Finance and State Taxation Administration announced the change on September 1, ending an exemption introduced in 1994.
Image via China Tax News WeChat
So, Does This Affect You?
Images via FX
For most foreign employees in China, probably not.
The policy does not introduce a new 20% tax on salaries or employment bonuses such as year-end bonuses.
It specifically covers dividend income and profit distributions.
In practical terms:
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What is taxed? Dividends and profit distributions received by foreign individuals from foreign-invested enterprises are taxed under the category of ‘interest, dividends, and profit distributions’ at a standard rate of 20%.
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Who handles the tax? The company paying the dividend must withhold the tax and file it by the 15th of the following month. If tax was not withheld, the recipient must generally pay it by June 30 of the following year.
What Happens Next?
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The exemption dates back to 1994, when China introduced a range of preferential policies for foreign investment.
The new announcement abolishes that exemption after 32 years and took effect on the same day it was issued, September 1.
While the 20% rate is clear, questions remain over how broadly the new policy will apply.
The South China Morning Post reported that a tax-service hotline could not yet confirm whether the new rule applies to residents of Hong Kong, Macao, and Taiwan or foreign nationals living overseas.
Further clarification may emerge as the policy is implemented.
In the meantime, foreign shareholders who may be affected should seek professional advice based on their individual tax circumstances.
What still needs to be clarified?
How could the change affect foreign business owners and investors in China?
Do you have any concerns about the new rule?
Share your thoughts in the comments below.
[Cover image via Pexels]