{"id":9633,"date":"2026-09-22T11:13:56","date_gmt":"2026-09-22T09:13:56","guid":{"rendered":"https:\/\/www.expatfeliu.com\/?p=9633"},"modified":"2026-09-22T11:13:56","modified_gmt":"2026-09-22T09:13:56","slug":"china-abolishes-long-standing-tax-exemption","status":"publish","type":"post","link":"https:\/\/www.expatfeliu.com\/en\/actualidad\/china-abolishes-long-standing-tax-exemption\/","title":{"rendered":"CHINA ABOLISHES THE LONG-STANDING TAX EXEMPTION ON DIVIDENDS RECEIVED BY FOREIGN INDIVIDUALS"},"content":{"rendered":"

China’s Ministry of Finance (MOF) and the State Taxation Administration (STA) published, on 1 September, Announcement No. 27 of 2026, introducing a particularly significant change for foreign individuals holding direct investments in Chinese companies.<\/p>\n

The new regulation removes a tax exemption that had been in force for more than three decades and provides that dividends and profit distributions obtained by foreign individuals from foreign-invested enterprises (FIEs) become taxable in China under the category of \u201cinterest, dividends and profit distributions\u201d, to which, under Chinese domestic law, a flat rate of 20 % applies.<\/p>\n

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An exemption in force since 1994<\/em><\/strong><\/p>\n

The measure expressly repeals article 2.8 of Cai Shui Zi [1994] No. 20, which since 1994 had provided a temporary Individual Income Tax exemption for dividends and profit distributions obtained by foreign individuals from foreign-invested enterprises.<\/p>\n

The exemption was introduced at a time when China sought to promote its economic opening and attract international investment through tax incentives specifically aimed at foreign capital.<\/p>\n

The official communications accompanying the reform stress the aim of moving towards greater uniformity of the tax system, establishing more balanced tax conditions between domestic and foreign investment, closing potential tax loopholes and further developing a unified national market.<\/p>\n

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Immediate application as from 1 September 2026<\/em><\/strong><\/p>\n

The change took effect on 1 September 2026. From that date, where a foreign-invested enterprise distributes dividends or profits to a foreign individual, it must, as a general rule, withhold the corresponding Individual Income Tax.<\/p>\n

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The 20 % domestic rate may be reduced under tax treaties<\/em><\/strong><\/p>\n

The application of the new regime does not necessarily mean that all foreign individuals will ultimately bear Chinese tax at 20 %. China has an extensive network of double tax treaties, many of which set maximum source-state rates on dividends below 20 %.<\/p>\n

Accordingly, the shareholder’s tax residence, the applicable treaty and compliance with the requirements for accessing treaty benefits must be analysed on a case-by-case basis.<\/p>\n

This is particularly relevant for Spanish tax residents, given the Convention between Spain and China for the elimination of double taxation, signed on 28 November 2018.<\/p>\n

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Impact on foreign investors and Chinese companies<\/em><\/strong><\/p>\n

The reform will require both foreign individual shareholders and Chinese companies with foreign capital to review their internal dividend distribution procedures.<\/p>\n

In particular, it will be necessary to determine each shareholder’s tax residence, check the existence and content of the relevant double tax treaty, verify whether the beneficiary meets the requirements to access the treaty rate, and hold the documentation needed to support its application.<\/p>\n

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Our advice<\/em><\/strong><\/p>\n

At Feliu N&I we help international companies and investors to anticipate and manage the impact of regulatory changes on their cross-border operations.<\/p>\n

Our specialists provide comprehensive support including, among others:<\/p>\n