From September 1, 2026, foreign individuals receiving dividends or profit distributions from foreign-invested enterprises in China are subject to individual income tax at a 20% rate.
The change was introduced through Ministry of Finance and State Taxation Administration Announcement No. 27 of 2026. At the same time, China repealed the provision that had allowed foreign individuals to receive dividends from foreign-invested enterprises without individual income tax since 1994.
For foreign founders, individual shareholders, finance teams, and foreign-invested enterprises, this is more than a headline tax-rate change. Companies that previously distributed profits to foreign individual shareholders without withholding IIT now need to build withholding, filing, payment, and documentation requirements into the dividend distribution process.
The key distinction is that the new rule applies to foreign individuals receiving equity-related dividend income. It is not a new 20% tax on foreign employees’ salaries, employment bonuses, or all payments made to foreigners in China.
What changed in China’s foreign individual dividend tax rules?
For more than three decades, a specific tax preference under Cai Shui Zi [1994] No. 20 allowed foreign individuals to receive dividends and profit distributions from foreign-invested enterprises without paying individual income tax on that income.
Announcement No. 27 of 2026 removes that exemption.
From September 1, 2026, qualifying dividends received by a foreign individual from a foreign-invested enterprise are taxed under China’s interest, dividend and bonus income category and are subject to a proportional tax rate of 20%.
| Issue | Before September 1, 2026 | From September 1, 2026 |
|---|---|---|
| Foreign individual receives a dividend from an FIE | Specific IIT exemption could apply under the 1994 rule | 20% IIT applies under Announcement No. 27 |
| Income category | Dividend income covered by the special exemption | Interest, dividend and bonus income |
| Withholding responsibility | No IIT withholding where the exemption applied | Paying FIE must withhold IIT |
| Effective date | Previous exemption remained available | September 1, 2026 |
The change does not create a completely new category of individual income tax. China’s Individual Income Tax Law already provides a 20% proportional tax rate for interest, dividend and bonus income. The major change is that the special exemption previously available to foreign individuals receiving dividends from FIEs has been removed.
For a broader overview of individual taxation, residence status, employment income, and foreign employee tax treatment, see our China individual income tax guide.
Who is affected by the new 20% dividend tax?
The new rule is most relevant when the following three elements are present:
- the recipient is a foreign individual;
- the payer is a foreign-invested enterprise in China; and
- the payment is a dividend, profit distribution, or other covered equity-related income.
Typical cases may include a foreign founder who directly owns shares in a Chinese WFOE, a foreign individual shareholder in a Sino-foreign joint venture, or another foreign natural person who directly receives dividends from a foreign-invested enterprise.
Does the 20% rule apply to foreign corporate shareholders?
Announcement No. 27 specifically addresses foreign individuals.
Where the shareholder of a Chinese company is an overseas corporation rather than an individual, the dividend falls under a different enterprise income tax and withholding framework. Companies should therefore identify the legal recipient before determining the applicable tax treatment.
This distinction also means businesses should not assume that changing the shareholder from an individual to a corporate entity automatically creates a better tax result. Corporate restructuring may raise separate issues involving beneficial ownership, tax treaties, commercial substance, corporate governance, and anti-avoidance rules.
Does the rule apply to salary or employment bonuses?
No.
The term “bonus” within the statutory category of interest, dividend and bonus income should not be confused with a performance bonus paid to an employee.
Salary, wages, and employment-related bonuses remain subject to their own IIT rules. Dividend income arises because the individual owns equity in the company rather than because the individual performs employment services.
A foreign founder may therefore receive both salary and dividends from the same Chinese company, but the two payments must be classified and taxed separately.
How is the 20% dividend tax calculated?
China’s Individual Income Tax Law provides that interest, dividend and bonus income is subject to a proportional 20% tax rate.
For this income category, the taxable amount is generally determined based on the amount received on each occasion. The progressive 3% to 45% tax rates that apply to comprehensive income such as salary are not used for dividend income.
This also means that the standard RMB 60,000 annual deduction used in the calculation of resident comprehensive income should not simply be deducted from dividend income.
For example:
| Item | Amount |
|---|---|
| Gross dividend payable to foreign individual | RMB 1,000,000 |
| IIT at 20% | RMB 200,000 |
| Net dividend after China IIT | RMB 800,000 |
This example illustrates the basic China domestic tax calculation only. The shareholder may also need to consider tax residence, tax treaties, foreign tax credits, and reporting obligations in another jurisdiction.
Who must withhold the 20% dividend tax?
The foreign-invested enterprise paying the dividend has the primary withholding responsibility.
When an FIE distributes covered dividend income to a foreign individual, the company should calculate the applicable IIT, deduct the tax from the gross dividend, remit the tax to the Chinese tax authority, and complete the corresponding filing.
The withholding process should therefore form part of the company’s dividend approval and payment workflow rather than being addressed only after the gross dividend has already been transferred.
When must the dividend tax be filed and paid?
Announcement No. 27 establishes a specific compliance timetable for both the paying enterprise and the individual taxpayer.
| Situation | Responsible Party | Deadline |
|---|---|---|
| FIE pays dividend to foreign individual and withholds IIT | Foreign-invested enterprise | File and remit the tax by the 15th day of the following month |
| FIE fails to withhold the tax | Foreign individual shareholder | Pay the tax by June 30 of the year following receipt of the income |
| Tax authority specifies another payment deadline | Foreign individual shareholder | Pay within the deadline stated by the tax authority |
The existence of a fallback payment obligation for the individual does not mean that the company may choose not to withhold. The paying FIE remains responsible for withholding when it makes the dividend payment.
What if the dividend was approved before September 1 but paid afterward?
This is one of the most important practical questions for companies that had already approved a profit distribution before the new rule became effective.
Announcement No. 27 became effective on September 1, 2026 and does not provide a specific grandfathering provision for dividends that had been approved but remained unpaid.
The announcement also places the withholding obligation on the FIE when it pays the dividend income.
Companies with dividends approved before September 1 but paid on or after that date should therefore not automatically assume that the previous exemption remains available simply because the shareholder resolution was adopted earlier.
Before completing the payment, the company should review the dividend approval date, payment date, shareholder documentation, accounting treatment, and current tax-authority requirements.
Does the change cancel foreign employee tax-exempt allowances?
No. Announcement No. 27 does not itself abolish the broader expatriate allowance regime.
The new announcement specifically repeals the provision of Cai Shui Zi [1994] No. 20 that granted an IIT exemption for dividends and profit distributions received by foreign individuals from foreign-invested enterprises.
Foreign employee tax treatment for qualifying housing, children’s education, language training, home-leave travel, relocation expenses, and other expatriate benefits is governed by separate rules and eligibility requirements.
Employers should therefore assess those items separately rather than assuming that the end of the dividend exemption automatically changes foreign employee compensation benefits.
For the wider employment tax framework, see our China IIT guide for foreign employees.
Is the new 20% dividend IIT a payroll tax?
Not in the normal payroll sense.
The payment is subject to individual income tax, but the income arises because the recipient owns equity in the company rather than because the recipient is an employee.
This distinction is particularly important where a foreign founder is both a shareholder and an employee of the Chinese entity.
| Payment Type | Why It Is Paid | General Tax Treatment |
|---|---|---|
| Monthly salary | Employment services | Employment income IIT rules |
| Performance bonus | Employment performance | Employment or bonus IIT rules |
| Dividend | Ownership of company equity | 20% dividend IIT under the new rule |
Finance, tax, and HR teams should therefore avoid processing shareholder dividends as though they were ordinary salary or employee bonuses.
For the wider distinction between salary withholding, payroll taxes, and employment-related IIT, see our China payroll tax guide.
Can a tax treaty reduce the 20% dividend tax?
Announcement No. 27 establishes the domestic China tax treatment for covered foreign individual dividend income.
However, a foreign shareholder’s final cross-border tax position may also depend on an applicable double taxation agreement, the individual’s country of tax residence, and the tax laws of the shareholder’s home jurisdiction.
Companies and shareholders should not assume that treaty relief automatically applies. Eligibility may depend on the specific treaty, the identity and residence of the beneficial recipient, procedural requirements, and the relevant tax authority’s interpretation.
For material distributions, treaty treatment should be reviewed before payment rather than after the dividend has already been remitted.
Can foreign tax credits reduce the shareholder’s overall tax burden?
Potentially.
If the foreign individual’s country of tax residence taxes the same dividend income, China IIT paid on the dividend may potentially qualify for foreign tax credit treatment under the foreign jurisdiction’s domestic rules or an applicable tax treaty.
However, foreign tax credits are not automatic. The availability and amount of a credit can depend on:
- the shareholder’s tax residence;
- the classification of the income in the foreign jurisdiction;
- foreign tax credit limitations;
- the relevant tax year;
- proof of Chinese tax paid; and
- applicable treaty provisions.
Foreign individual shareholders receiving significant dividends should therefore review the China tax treatment and their residence-country tax position together.
Does the new rule change China’s corporate income tax?
No. The 20% tax under Announcement No. 27 applies at the foreign individual shareholder level.
The foreign-invested enterprise must still first determine whether it has legally distributable after-tax profits. Corporate income tax, recovery of prior-year losses, statutory reserve requirements, accounting treatment, shareholder approvals, and outbound remittance procedures remain separate compliance issues.
In simplified terms, the dividend process generally follows this sequence:
- The Chinese company calculates and settles its corporate tax obligations.
- The company determines the amount of legally distributable after-tax profit.
- The appropriate corporate body approves the dividend distribution.
- The company identifies the legal shareholder and applicable tax treatment.
- If the recipient is a covered foreign individual, the FIE calculates and withholds 20% IIT.
- The company transfers the net dividend and completes the required tax filing.
Foreign businesses reviewing the broader framework can also refer to our guide to the China taxation system.
What should foreign-invested enterprises do before the next dividend payment?
For FIEs with foreign individual shareholders, the most important step is to update the dividend-payment workflow before another distribution is released.
1. Review the shareholder register
Identify whether each shareholder is a foreign natural person, a Chinese individual, or an overseas corporate shareholder. Different tax rules can apply depending on who legally receives the dividend.
2. Identify approved but unpaid dividends
Review distributions that were approved before September 1, 2026 but remain unpaid. Do not rely automatically on the former exemption merely because the underlying resolution was adopted before the new rule became effective.
3. Build the 20% withholding into the dividend approval process
Internal finance documentation should clearly show the gross dividend amount, applicable IIT, tax withheld, and net amount payable to the shareholder.
4. Update the tax compliance calendar
The company should ensure that the withholding filing and payment deadline is tracked internally so the tax is remitted by the required deadline.
5. Retain supporting documentation
Companies should maintain sufficient records to support the transaction, including:
- shareholder resolutions;
- shareholder identity and ownership information;
- profit-distribution calculations;
- financial statements and accounting records;
- IIT calculations;
- tax filings and payment evidence; and
- bank remittance records.
6. Provide tax-payment evidence to the shareholder
Foreign shareholders may need documentation showing Chinese IIT paid when preparing tax returns or claiming foreign tax credits in another jurisdiction.
7. Review cross-border tax exposure before large distributions
For material dividends, the shareholder should review China tax, treaty eligibility, residence-country taxation, and foreign tax credit treatment before the payment is released.
What does the policy change mean commercially?
The immediate financial effect is straightforward: foreign individual shareholders can no longer assume that dividends distributed by an FIE will be received free of Chinese individual income tax.
For example, a foreign founder expecting a gross dividend of RMB 1 million may now receive approximately RMB 800,000 after the headline 20% China IIT, before taking into account any tax consequences in another country.
This can affect shareholder cash-flow forecasts and may change how founders assess the balance between salary, dividends, retained earnings, and future distributions.
However, businesses should not respond by simply relabeling dividend income as salary, reimbursement, consulting fees, or another payment category. The tax treatment should follow the legal and commercial substance of the payment.
For finance teams, the more immediate operational change is the need to establish a documented withholding and filing process for payments that may previously have been distributed to foreign individual shareholders without IIT.
Key Takeaways for Foreign Shareholders and FIEs
- China’s foreign individual dividend exemption ended on September 1, 2026.
- Covered dividends from foreign-invested enterprises are now subject to 20% IIT.
- The foreign-invested enterprise is responsible for withholding the tax when paying the dividend.
- The tax should generally be filed and remitted by the 15th day of the following month.
- The new rule applies to shareholder dividend income, not automatically to salary or employment bonuses.
- Approved but unpaid dividends require careful review because Announcement No. 27 does not provide an explicit grandfathering rule.
- Foreign individual shareholders should also consider treaty treatment and foreign tax credit implications in their country of tax residence.
FAQ
What is China’s new dividend tax for foreign individuals in 2026?
From September 1, 2026, foreign individuals receiving dividends or profit distributions from foreign-invested enterprises in China are subject to individual income tax at a 20% rate under the interest, dividend and bonus income category.
When did the foreign individual dividend tax exemption end?
The exemption ended on September 1, 2026. Ministry of Finance and State Taxation Administration Announcement No. 27 of 2026 repealed the provision in Cai Shui Zi [1994] No. 20 that had previously exempted qualifying dividends received by foreign individuals from foreign-invested enterprises.
Who is responsible for withholding and paying the 20% dividend tax?
The foreign individual is the taxpayer, while the foreign-invested enterprise paying the dividend is responsible for withholding and remitting the applicable IIT. The tax withheld should generally be filed and paid by the 15th day of the following month.
Does the new 20% rule apply to salary and employment bonuses?
No. The rule applies to covered dividend and profit-distribution income received by foreign individuals from foreign-invested enterprises. Salary, wages, and employment-related bonuses continue to be taxed under separate individual income tax rules.
What if a dividend was approved before September 1, 2026 but paid afterward?
Announcement No. 27 does not provide a specific grandfathering rule for approved but unpaid dividends. Companies should confirm the applicable tax treatment before completing the payment rather than assuming that the previous exemption remains available because the distribution was approved before September 1.
This article is intended for general informational purposes and does not constitute legal or tax advice. Foreign-invested enterprises and foreign individual shareholders should assess material dividend distributions based on their specific ownership structure, payment timing, tax residence, applicable treaty position, and current tax authority requirements.
