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China Ends Dividend Tax Exemption: What Foreign Individual Shareholders Need to Know

29 September 2026

By Maarten Roos, Fenny Wu

For more than three decades, foreign individuals holding shares in a Chinese foreign-invested enterprise (FIE) received their dividends free of Chinese tax. Some Chinese entrepreneurs reportedly even acquired a foreign nationality so that, as foreign shareholders, they could receive dividends from their own company tax-free.

The 32-year exemption has ended

On 1 September 2026, the Ministry of Finance and the State Taxation Administration issued Announcement No. 27 of 2026. It repeals Article 2(8) of Circular Caishuizi [1994] No. 20, the clause that had exempted foreign individuals' dividends from FIEs since 1994.

From 1 September 2026, these dividends are taxed as "interest, dividends and bonuses" at 20% Individual Income Tax (IIT). The FIE must withhold the tax when it pays the dividend and file by the 15th of the following month. If it fails to withhold, the foreign shareholder must pay the tax by 30 June of the following year. There is no transition period: every dividend paid on or after 1 September 2026 is caught.

Check your tax treaty first

A lower rate may be available without any restructuring. If you are a tax resident of a country that has a tax treaty with China, that treaty may cap the Chinese tax on your dividends below 20%. As a resident individual of the treaty country, you are directly recognised as the beneficial owner of the dividends, without a further substance test.

This route is closed if China still regards you as a Chinese tax resident, see below.

Setting up a holding company?

Another way to reduce exposure is to set up a holding company in another jurisdiction and transfer your equity in the China company to it. But where should that holding company be established?

China levies a 10% withholding tax on dividends paid to any foreign company, wherever it is located (a 20% statutory rate, reduced to 10%). A tax treaty between China and the holding company's jurisdiction can lower this rate, but only if the holding company is the beneficial owner of the dividends.

When is your holding company the beneficial owner?

There is no fixed checklist. Under Announcement No. 9 of 2018, the tax authority weighs all the circumstances of the case. Factors that count against beneficial ownership include:

the holding company must pass more than 50% of the income on to third-country residents within 12 months;
it carries out little or no substantive business activity; and
its own country taxes the income lightly or not at all.

The more of these factors apply, the less likely your holding company will receive treaty benefits. This mechanism was created to prevent treaty abuse.

For dividends, the "safe harbor rule" offers a shortcut. Your holding company is directly recognised as the beneficial owner if all of the following apply:

you own 100% of it, directly or indirectly;
you are a tax resident of the same treaty country as the holding company;
any intermediate companies are resident in China or in that same country; and
the 100% holding is maintained throughout the 12 months before the dividend.

This is much quicker than the standard substance assessment, but it is not automatic. You assess your own eligibility, claim the treaty rate when the tax is filed, and keep the supporting documents for later inspection. The structure may also have tax consequences in your own country.

Do you get a reduced rate? You are not there yet

Even with a lower Chinese rate, the story does not end. Two other types of tax also need to be examined.

First, consider the country where your holding company is located. Hong Kong used to treat foreign dividends as "offshore" income outside its profits tax. Since 1 January 2023, however, its foreign-sourced income exemption (FSIE) regime can make foreign dividends received in Hong Kong by multinational group entities taxable. They remain exempt only if the holding company meets the economic substance requirement or qualifies for the participation exemption.

Next, look at the controlled foreign company (CFC) rules in your home country. CFC rules can tax your holding company's profits as they arise, before anything is distributed. These rules differ from country to country, so check your own situation.

Do you live in China? Since 2019, China's Individual Income Tax Law has contained its own CFC rule for individuals. The tax authority can adjust your tax if three conditions are met:

you, as a Chinese tax resident, control the company;
the company is located in a jurisdiction with a clearly low effective tax rate; and
without a reasonable business need, it does not distribute, or reduces distributions of, profits attributable to you.

The tax authority can then collect the tax plus interest. Simply "not distributing" is therefore no guarantee of escaping tax.

A foreign investor living in China? Here is what you need to know

If you also live in China, two questions decide how you are taxed: do you have a domicile in China, and if not, where do you stand under the six-year rule?

Domicile. Chinese law treats you as domiciled in China if you habitually reside there because of household registration, family or economic ties. If so, you are a Chinese tax resident from the first day and taxed on your worldwide income. A new nationality or a residence abroad does not change this. The six-year rule does not apply to you, and you generally cannot rely on the treaty relief described above.

The six-year rule. If you have no domicile in China, a year counts if you spend 183 days or more in China that year. Only days with a full 24 hours in China count. After six consecutive counted years (counting began in 2019), you are taxed on your worldwide income, including foreign dividends, in any following year in which you again spend 183 days or more in China. Until then, foreign-source income paid from abroad is exempt.

The count resets if, in any year, you spend fewer than 183 days in China or leave China once for more than 30 consecutive days.

What now?

A foreign passport no longer protects your Chinese dividends. A tax treaty may still reduce the rate, but a holding company is not an automatic way out. Have our professionals review your situation and advise you on the optimal structure going forward, which could save you an expensive surprise.

R&P advises international companies and individuals on their corporate structuring in China, and on tax-related matters. For more information on this subject, please reach out to Maarten Roos (roos@rplawyers.com), or your trusted contact at R&P China Lawyers.