Improved taxation focus drives policy shift to improve biz environment

China has ended a decades-old tax exemption on dividends and bonuses received by foreign individuals from foreign-invested enterprises, a move experts said would further promote fair and consistent tax treatment, helping foster a more enabling business climate for foreign investors.

The policy shift, which reflects the country's reduced reliance on tax incentives to attract foreign capital, would also help close tax loopholes and advance the development of a unified national market, they added.

The adjustment took effect on Tuesday, requiring foreign individuals to pay a 20 percent individual income tax on dividends and bonuses received from foreign-invested enterprises, said a joint announcement by the Ministry of Finance and the State Taxation Administration.

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Under China's individual income tax law, dividend and bonus income has long been subject to a 20 percent tax. To advance reform and opening-up and attract foreign investment, the country introduced a temporary exemption in 1994 for such income received by foreign individuals from foreign-invested enterprises.

"The exemption, introduced more than three decades ago, helped attract foreign investment at a particular stage of China's development," said Liu Yi, director of the China Center for Public Finance and Taxation at Peking University.

As China accelerates efforts to build a high-standard socialist market economy, foreign investors are increasingly looking beyond tax incentives to the broader business environment, including the rule of law, market size and the strength of its industrial ecosystem, Liu said, adding, "At present, such preferential tax treatment is no longer an appropriate tool for attracting foreign investment."

Li Xuhong, vice-president and professor at the Beijing National Accounting Institute, echoed Liu's view, noting that countries tend to rely less on tax incentives to attract foreign investment as their economies develop and focus more on building a stable, well-functioning and fairer market environment.

"The policy adjustment will help ensure taxes are applied fairly and consistently and improve the climate for foreign investment," Li said, adding that it would also help close tax loopholes and advance the development of a unified national market.

Addressing market concerns over the removal of the exemption, Li said the change would not increase the actual tax burden on foreign individual shareholders of foreign-invested enterprises.

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Liu at Peking University pointed out that some economies in Europe and North America tax residents on their worldwide income, regardless of where they reside. Foreign individuals receiving dividends and bonuses from foreign-invested enterprises in China therefore remained liable to pay taxes in their countries of residence, even when such income was exempt in China.

"With the exemption lifted, income tax paid in China can be credited against their tax liabilities in those countries, meaning their actual tax burden will not increase," Liu said.

The policy adjustment comes as the Chinese market remains a strong draw for foreign investors, with 37,711 foreign-invested enterprises newly established nationwide in the first seven months of the year, up 4.4 percent year-on-year, the Ministry of Commerce said.

Contact the writers at zhangchenxu@chinadaily.com.cn