China has begun levying a 20% individual income tax on certain dividends received by foreign investors from foreign-invested companies, ending an exemption that had been in place since 1994, effective from September 1, according to a Bloomberg report. This change aligns the dividend tax rate for foreigners with that for Chinese nationals and is part of the Chinese government's plan to increase revenue and close tax loopholes, which includes taxing offshore trusts established by Chinese citizens and scrutinizing gains from securities trading abroad. The measure will eliminate a channel that some foreign investors in Chinese companies used to receive large dividends while paying minimal tax, impacting business structures such as VIE and Red Chip, which were popular routes for Chinese companies like Alibaba Group to list shares overseas. Analysts at Australia & New Zealand Banking Group noted that the total annual dividend payments of affected companies could reach tens of billions of yuan. Companies with foreign investment must withhold tax when paying dividends and remit it by the 15th of the following month; if not withheld, foreign individuals must pay the tax themselves by June 30 of the following year.
Alibaba Group Holding LtdChina's new 20% tax on foreign dividend income affects Alibaba's VIE structure, reducing after-tax dividends for foreign investors.
