Key Insights on Cancellation of PRC Individual Income Tax Exemption of Dividends Derived by Foreign Individuals from China

Background

On 1 September 2026, the PRC Ministry of Finance ("MOF") and the PRC State Administration of Taxation ("SAT") jointly issued Announcement [2026] No. 27 ("Announcement 27"), which officially terminates the long-standing Individual Income Tax ("IIT") exemption treatment on dividends distributed by foreign-invested enterprises ("FIEs") to foreign individuals (including Chinese citizens from Hong Kong, Macau and Taiwan from PRC tax perspectives). Taking effect on the date of its release, Announcement 27 officially brings a 32 years' era of preferential IIT treatment to an end.

Evolution of the IIT policy on dividends derived by foreign individuals from FIEs

1. Phase I – general IIT exemption

It is clear that the dividends distributed by the FIEs to foreign individuals are PRC-sourced incomes, over which the PRC tax authorities retain the taxation right, regardless of the tax residency of the foreign individuals. However, the Chinese government granted the IIT exemption on such incomes from as early as 1990's. In 1993, the tax circular Guo Shui Fa [1993] No. 45, which was abolished in 2011, laid the initial legal foundation for IIT exemption of dividend incomes derived by foreign individuals from Sino-foreign joint venture enterprises.

In 1994, the tax circular Cai Shui Zi [1994] No. 20 ("Circular 20") officially opened the 32 years' period of IIT exemption for foreign individuals receiving dividends from FIEs.

2. Phase II – divergence in implementation based on the opinion of the PRC State Council

In 2013, the PRC State Council issued the circular Guo Fa [2013] No. 6 ("Circular 6"), in which the cancellation of IIT exemption on dividends received by foreign individuals from the FIEs, as a part of the reform of social income distribution, was introduced. Circular 6 only expressed the opinions from the State Council and there had not been formal regulations issued to really cancel the IIT exemption treatment until the promulgation of Announcement 27.

However, based on our observation, divergence in local implementation had arisen since the promulgation of Circular 6. Some local tax authorities already began to stop granting IIT exemption treatment to the dividends received by foreign individuals from FIEs because it was a common expectation that the IIT exemption treatment would be cancelled irreversibly, sooner or later. For example, the Local Tax Bureau of Hubei Province issued Announcement [2013] No. 1, which cancelled the IIT exemption treatment locally pursuant to Circular 6. The practice adopted by Hubei Local Tax Bureau caused considerable practical controversies because Circular 6 was just an opinion without formal legal basis yet. In 2018, the SAT cleaned up local normative documents and officially repealed the the above Hubei announcement.

3. Phase III – official re-affirmation of the IIT exemption treatment 

The SAT reunified national enforcement back to Circular 20 in 2018, with the repeal of the Hebei announcement. Meanwhile, Article 8 of the circular Cai Shui [2018] No. 164 confirmed the continuing validity of the existing preferential IIT policies after the new PRC IIT Law took effect from 1 January 2019. In practice, the SAT has, via public responses to the queries raised through the official website, consistently confirmed the validity of the IIT exemption treatment since then. 

4. Phase IV – final cancellation of the IIT exemption treatment due to Announcement 27

The promulgation of Announcement 27 officially repeals the IIT exemption treatment under Circular 20. Announcement 27, effective from 1 September 2026, thus, formally closes the 32 years' period of IIT exemption treatment on the dividend incomes received by foreign individuals from FIEs.

Key Stipulations Brought by Announcement 27 to the Current Phase (i.e., Phase IV)

1. Applicable tax item and tax rate 

It is explicitly stipulated in Announcement 27 that the dividends received by foreign individuals from the FIEs shall be subject to 20% IIT applicable to the tax item of "interests and dividends".

2. IIT filing requirements

According to Announcement 27, the FIE distributing the dividends shall fulfill the obligation to withhold and file IIT for the foreign individual within 15 days of the month following the month during which the dividends are paid.

In case the FIE fails to fulfill the withholding obligation, the foreign individual is required to self-declare and pay IIT by 30 June of the year following the year during which the dividends are received, or within the time limit requested by tax authorities.

Analysis of the Possible Approach for Mitigating the Tax Exposure

1. Mitigation of IIT exposures through treaty protection

Although Announcement 27 stipulates the applicable flat IIT rate of 20% on the dividend incomes, the domestic law shall cede jurisdiction to the valid bilateral double taxation treaties ("DTTs") or arrangements ("DTAs") between Mainland China and the jurisdiction of which the foreign individual is a tax resident. According to most valid DTTs and DTAs, a reduced dividend income tax rate of 10% is given as long as the shareholder is the beneficial owner of the dividend income. In fact, according to SAT Announcement [2018] No. 9, the tax resident individual of the other contracting jurisdiction (with which Mainland China has signed a valid DTT or DTA) is naturally regarded as a beneficial owner of the dividend income derived from Mainland China.

In light of the above, if the foreign individual receiving dividend incomes from an FIE can provide his / her tax resident certificate of the jurisdiction with which Mainland China has signed a valid DTT or DTA, there is a high chance to achieve the reduced IIT rate of 10% through application for the treaty benefit in China. 

2. Tax anti-avoidance administration on treaty benefit

The pre-requisite for enjoying the treaty benefit is that the foreign individual receiving dividend incomes from the FIE must be a qualified foreign tax resident. If, for example, the foreign individual has stayed in Mainland China for 183 or more days during a calendar year, he / she will be treated as a PRC tax resident individual according to the PRC IIT Law. In this situation, if he / she needs to claim the treaty benefit, providing his / her foreign tax resident certificate may not be sufficient, because the PRC tax authorities can evaluate his / her actual tax residency based on the tie-break rule under the applicable DTT / DTA. Normally as long as his / her economic center is deemed to be in China, it is possible that the PRC tax authorities will still treat him / her as a PRC tax resident instead of a foreign tax resident so that the treaty benefit will become inapplicable and the IIT rate of 20% under the PRC domestic law will apply.

In addition, many DTTs / DTAs include a Principal Purpose Test ("PPT") clause that the treaty benefit will not be granted in the event that the main purpose of a transaction or arrangement is to achieve the treaty benefit which conflicts with the purpose and the intention of the DTT / DTA. For example, if the other contracting jurisdiction of which the foreign individual is a tax resident levies no or very low tax on the dividend incomes from China, the main purpose of enjoying the treaty benefit in China may be regarded as avoiding fair tax burdens in both China and the other jurisdiction. Under such a circumstance, the treaty benefit may not be granted because of failing the PPT.

Suggestions

• The FIEs that distribute dividends to foreign individuals should start making IIT withholding declarations for the foreign individuals from 1 September 2026. The foreign individual should self-declare IIT in case the FIE fails to fulfill the IIT withholding obligation.
• If the foreign individual is eligible for the treaty benefit and decides to apply for the treaty benefit, he / she should obtain his / her tax resident certificate from the competent tax authorities of the foreign jurisdiction.
• The foreign individual and the FIE that distributes dividends to the foreign individual should, before applying for the treaty benefit, evaluate carefully the foreign individual's tax residency and whether the PPT can be passed.