China shuts 32-year tax loophole used by wealthy Chinese

(Edited and refined by Bai Kelei, with the assistance of AI translation.)

China has announced the removal of a tax exemption on dividends and bonuses received by foreign individuals from foreign-invested enterprises, bringing them under the country’s personal income tax regime. The move ends a preferential policy for foreigners that had been in place for 32 years, and is seen as yet another measure to close cross-border tax loopholes and strengthen tax oversight.

Analysts said the move restores the original principle of fairness in the tax system and targets wealthy Chinese posing as foreign investors to exploit the system.

China’s Ministry of Finance and State Taxation Administration jointly announced on Tuesday (1 September) that foreign individuals would no longer be exempt from personal income tax on dividends and bonuses received from foreign-invested enterprises with immediate effect.

Following this, foreign individuals must pay tax at 20% on the relevant dividend and bonus income, in accordance with China’s individual income tax law.

Closing a 32-year tax loophole

The tax exemption introduced in 1994 played a positive role in attracting foreign investments during the early years of China’s reform and opening-up. However, it also enabled some companies to exploit tax-avoidance loopholes.

According to reporting from China Central Television News on 1 September, these companies first change their status to foreign-invested enterprises, before benefiting from the tax exemption by transferring assets through distributing substantial dividends.

Bloomberg, citing Xing Zhaopeng, a senior China strategist at Australia and New Zealand Banking Group, reported that the impacted companies distribute dividends collectively worth hundreds of billions of RMB annually (100 billion RMB is around US$14.1 billion).

Shen Meng, executive director at Chanson & Co, told Lianhe Zaobao that the measure would have limited impact on genuine foreign nationals, as foreign investors establishing foreign-invested enterprises in China generally do so as corporate entities. In contrast, some wealthy Chinese change their nationalities and convert their companies into foreign-invested enterprises in order to avoid tax. This group will be more severely affected.

A shift toward tax fairness

Both Shen and Peng opined scrapping the tax exemption represents a return to the principle of tax fairness.

Peng said that the preferential policy was designed more than 30 years ago around the notion that “prioritises development over fairness”. But at China’s current stage of development, it is more pressing to address issues of fairness.

Shen added, “China is very different from what it was more than three decades ago. Such tax incentives no longer benefit the Chinese economy. Instead, they have become loopholes that some wealthy Chinese emigrants can exploit.”

He went on to say that the thinking behind scrapping the tax exemption is similar to the taxation of offshore trusts announced earlier. Amid current economic and fiscal pressures, the Chinese government will enforce tax rules more strictly and close loopholes.

China began stepping up its taxation of citizens’ overseas income in 2025. In July this year, it also started taxing offshore trusts, including prior income generated, established by Chinese citizens to close loopholes used by the wealthy.

Peng concluded, “Overall, this policy adjustment is guided by fairness. Its positive and objective effects are to broaden the tax base and increase fiscal revenue.”

This article was first published in Lianhe Zaobao as “中国取消一项逾30年外籍免税政策 防中国富豪以’假外资’套利”.

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