China’s Ministry of Finance and State Taxation Administration (SAT) have issued Announcement No. 27 of 2026, abolishing the long-standing individual income tax exemption for dividends and bonuses received by foreign individuals from foreign-invested enterprises (FIEs). Effective 1 September 2026, such income is taxed under the “interest, dividends and bonuses” category at a flat IIT rate of 20%. The change creates new withholding, reporting and cash-flow considerations for foreign individual shareholders and the enterprises making dividend payments.
In light of the new withholding obligation, affected taxpayers should move from impact assessment to implementation. Before future dividend distributions, foreign individual shareholders, FIEs and multinational groups should confirm who is responsible for withholding, whether any treaty relief may be available, how the tax cost affects dividend planning and how affected shareholders will be informed. Key actions include:
Gordon Gao
Rebecca Chen
BDO in China
Comparison of the Former Exemption and the New Policy
| Features | Previous Policy | New Policy |
| Core provision | Foreign individuals enjoyed a complete exemption from Chinese IIT on dividends and bonuses received from foreign-invested enterprises. | The exemption is abolished. Foreign individuals must now pay Chinese IIT on dividend and bonus income from FIEs under the "interest, dividends and bonuses" category. |
| Tax rate | 0% | 20% |
| Historical context and purpose | The exemption was introduced during China’s early opening-up period to attract foreign investment, encourage capital inflows and support the development of FIEs. It was part of a broader package of tax incentives to make China competitive for foreign investment. | The preferential treatment is eliminated to align the taxation of foreign individuals with the standard IIT framework, reflecting China’s shift toward a more mature and unified tax system as foreign investment incentives are phased out. |
| Withholding and reporting | Not applicable | FIEs must withhold IIT at source when paying dividends to foreign individual shareholders, and must declare and remit the withheld amount by the 15th day of the month following the month of payment. |
| Self-declaration | Not applicable | If the FIE fails to withhold the IIT, the foreign individual recipient must self-declare and pay the tax by 30 June of the year following receipt of the dividend income. |
| Tax authority notice | Not applicable | If the SAT issues a notice requiring payment within a specified period, the foreign individual must comply with that deadline. |
Impact of the Change on Affected Parties
The abolition of the dividend income tax exemption and the imposition of a 20% IIT will affect three groups: foreign individual shareholders, FIEs and multinational groups with China investment structures. For shareholders, the immediate effect is a lower net dividend return and potential self-declaration exposure if the paying enterprise does not withhold correctly. For FIEs, the change creates a new operational withholding obligation that should be embedded into dividend payment, tax reporting and shareholder communication processes. For multinational groups, the change may require a reassessment of dividend timing, tax treaty positions and holding structures.- Foreign individual investors: Foreign individual shareholders will face a 20% tax on dividend and bonus income that was previously exempt, reducing after-tax dividend receipts and expected investment returns. They should factor the new IIT cost into cash-flow planning and confirm whether the paying enterprise has properly withheld and remitted the tax, as self-declaration may be required if withholding is not completed.
- FIEs: FIEs will need to operate as withholding agents for dividends paid to foreign individual shareholders. Before making distributions, they should confirm withholding calculations, remittance deadlines, supporting records and shareholder notification procedures are incorporated into their dividend payment workflow.
- Multinational enterprises: Multinational groups with foreign individual shareholders should reassess the tax efficiency of China profit repatriation. The new 20% IIT charge may increase the effective cost of individual-level dividend distributions and could affect dividend timing, ownership structures and treaty-relief analysis.
BDO Perspective
In light of the new withholding obligation, affected taxpayers should move from impact assessment to implementation. Before future dividend distributions, foreign individual shareholders, FIEs and multinational groups should confirm who is responsible for withholding, whether any treaty relief may be available, how the tax cost affects dividend planning and how affected shareholders will be informed. Key actions include:
- Review existing investment structures: Consider whether to hold investments through alternative vehicles. For example, corporate entities that may benefit from treaty-reduced withholding rates may be more tax-efficient. Evaluate the costs and benefits of restructuring existing holdings before the effective date.
- Explore tax treaty benefits: Review whether any applicable double tax agreement between China and the foreign individual’s jurisdiction of tax residence provides relief for dividend income. Where appropriate, obtain confirmation from the relevant tax authorities before relying on treaty relief.
- Update payroll and accounting systems: Configure systems to automatically calculate the 20% withholding tax on dividends payable to foreign individual shareholders from 1 September 2026.
- Communicate with foreign shareholders: Proactively inform foreign individual shareholders of the tax change, expected impact on net dividends and any action they may need to take if withholding is not completed. Clear advance communication can help manage expectations and preserve investor relations.
Gordon Gao
Rebecca Chen
BDO in China