- Osome Blog HK
- China's 2026 Dividend Tax
China's 2026 Dividend Tax: What It Means for Hong Kong Holding Firms
- Published: 28 October 2026
- 10 min read
- Foreigner's Guide, Taxes & Compliance
Ruth Dsouza
Author
Ruth Dsouza Prabhu is a content developer passionate about shaping ideas into compelling narratives. Drawing on her experience in marketing communications and lifestyle writing, she brings clarity to complex business topics for entrepreneurs. Her work spans strategy, storytelling, and thought leadership, offering readers content that is both credible and impactful.
Sherman Ieong
Reviewer
Sherman Ieong is our Accounting & Tax Manager based in Hong Kong. She is on hand to help our writers level-up our blog posts and guides by making sure the information is accurate, informative and inspiring. Osome’s all-in-one accounting services make managing tax effortless - and that’s exactly what Sherman ensures we do with our Hong Kong-focused blog content, applying her knowledge of day-to-day bookkeeping, monthly financial reporting, Profits Tax Returns and much more.
On 1 September 2026, China's dividend tax change ended a 32-year tax break for foreign investors. This means foreigners now pay 20% tax on dividends and bonus distributions from their mainland companies, with the cost landing on founders and executives with mainland shareholdings. This guide explains the new rule and how a Hong Kong holding company can ease that cost.
Key Takeaways
- China's 2026 dividend tax change ended a 32-year exemption,.so foreign individuals now pay 20% tax on dividends and bonus distributions from mainland foreign-invested enterprises.
- The 20% rate applies to any dividend paid on or after 1 September 2026, even if the company declared it before that date.
- Hong Kong does not tax dividends, and its tax arrangement with the mainland can cut withholding on dividends paid to a Hong Kong company to five per cent.
- A paper holding company is not enough, as Chinese tax authorities check beneficial ownership and real business activity before granting the lower treaty rate.
What Is China's New Dividend Tax For Foreign Individuals?
China's new dividend tax requires foreign individuals to pay 20% individual income tax (IIT) on dividends from mainland foreign-invested enterprises (FIEs). The Ministry of Finance (MOF) and the State Taxation Administration (STA) introduced it through Announcement 2026 No. 27, effective 1 September 2026.
The rule replaces an exemption granted in 1994 under Caishuizi [1994] No. 20. For 32 years, foreign shareholders and executives holding FIE equity received dividends tax-free, while mainland Chinese shareholders paid 20%. Residents of Hong Kong, Macao and Taiwan were exempt too, as they counted as foreign individuals.
Today, foreign and mainland shareholders pay the same rate. The table below sets out what has changed.
Issue | Before 1 September 2026 | From 1 September 2026 |
|---|---|---|
| IIT on FIE dividends to foreign individuals (including Hong Kong, Macao and Taiwan residents) | Exempt | 20% of the gross dividend |
| Who handles the tax | No withholding needed | The FIE withholds and files by the 15th day of the following month |
| Which dividends are caught | None | Any dividend paid on or after 1 September 2026, including from older profits |
| If the FIE does not withhold | No action needed | The individual must pay the tax by 30 June of the following year |
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How Does China's 20% Dividend Tax Affect Foreign Shareholders?
The 20% rate cuts what foreign shareholders take home from every mainland dividend. It also creates new duties for the companies that pay them. Four effects matter most: lower returns, new withholding duties, the payment-date rule and the loss of relief for Hong Kong, Macao and Taiwan residents.
Lower returns on every dividend
A foreign shareholder now keeps 80% of each gross dividend, down from 100%. On a dividend of 1,000,000 renminbi (RMB), that means RMB 200,000 in tax.
Expert commentary reported by Xinhua says investors from countries that tax worldwide income can often offset Chinese tax against tax at home. Investors in places that do not tax foreign dividends, such as Hong Kong, get no such offset.
For founders with mainland holdings, the new 20% rate turns a previously exempt payout into a recurring cost. The solution isn't a shell company—it is a Hong Kong holding structure with genuine economic substance, active local operations, and robust corporate governance."
Accounting & Tax Manager
New withholding duties for FIEs
Every FIE paying dividends to a foreign individual must now withhold the tax at source. It must file and pay by the 15th day of the month after payment. If it does not, the individual must declare and pay by 30 June the following year.
FIEs that have never handled withholding tax on dividends now need new treasury and filing steps. Boards should update dividend resolutions and payment checklists before the next distribution, so the correct amount reaches the tax bureau on time.
Payment date decides which rule applies
The tax applies to any dividend paid on or after 1 September 2026, even if the board declared it earlier. A dividend declared in June 2026 but paid in October 2026 is taxed at 20%.
The rule also reaches older profits. Retained earnings built up during the exemption years are taxed when they are distributed now. The announcement took effect on the day it was published, so there was no window to bring payments forward. Founders planning payouts should build the 20% cost into each distribution now.
Hong Kong, Macao and Taiwan residents lose their relief
Residents of Hong Kong, Macao and Taiwan who hold FIE shares in their own names now pay the tax too. Cross-border founders often hold shares this way, so the impact is wide.
Treaty relief can soften the blow. Under the double taxation arrangement (DTA) between the mainland and Hong Kong, dividends paid to a Hong Kong resident are taxed at no more than 10%. Individual Hong Kong residents automatically count as beneficial owners under STA rules, which makes this relief easier to claim.
If your FIE declared a dividend before 1 September 2026 but has not paid it yet, the 20% rate applies on payment. Check payment timetables and withholding set-up with your tax adviser before funds leave the mainland.
How Can A Hong Kong Holding Company Reduce China's Dividend Tax?
A Hong Kong holding company can cut mainland tax on FIE dividends from 20% to as little as five per cent. The DTA lowers mainland withholding, and Hong Kong does not tax the dividends that pass through. Osome is already seeing founders cite this exact reason when they ask to set up a holding company in Hong Kong.
The saving comes from three rules working together:
- Mainland withholding on dividends paid to a Hong Kong company falls from 10% to five per cent if it holds at least 25% of the mainland enterprise.
- Hong Kong does not tax dividends a company receives under its separate profits tax regime, although holding companies in multinational groups must still meet foreign-sourced income exemption (FSIE) conditions — a company-level rule, distinct from the individual income tax discussed earlier in this guide.
- Dividends the holding company pays to its own shareholders carry no Hong Kong tax or withholding.
The table below compares the total tax on the same mainland dividend under three ways of holding FIE shares.
Ownership route | Mainland tax on the dividend | Hong Kong tax |
|---|---|---|
| Foreign individual holds FIE shares directly | 20%, or a lower treaty rate | Not relevant |
| Hong Kong resident individual holds directly | Up to 10% under the DTA | None |
| Hong Kong company directly holds at least 25% | Five per cent under the DTA, if it is the beneficial owner | None on receipt or payout |
Tax in the shareholder's home country may still apply once profits leave Hong Kong.
Example
A founder receiving a RMB 1,000,000 dividend from an FIE pays RMB 200,000 when holding the shares directly. Through a qualifying Hong Kong holding company, mainland withholding falls to RMB 50,000, and Hong Kong adds nothing, saving RMB 150,000 on that payout.
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What Substance Does A Hong Kong Holding Company Need?
A Hong Kong holding company needs real staff, premises and decision-making in Hong Kong to secure the five per cent rate. One run as an offshore company with no local activity risks losing it, because the STA grants treaty rates only to a dividend's beneficial owner.
Under STA Announcement 2018 No. 9, three factors count against that status:
- An obligation to pay at least 50% of the income to a third-country resident within 12 months
- Investment holding with no other substantial business
- Little or no tax on the income in Hong Kong
A Hong Kong company wholly owned by Hong Kong resident individuals, or by a Hong Kong-listed company, automatically qualifies. Other owners can build substance in five steps:
- Appoint directors who make and minute decisions in Hong Kong.
- Hire qualified staff and keep a real office.
- Run the bank account and records locally.
- Keep audited accounts and filings current.
- Obtain a Certificate of Resident Status from the Inland Revenue Department (IRD).
Substance lives in the paperwork. Our company secretary services keep your statutory registers, annual general meeting documents, and annual return filings up to date, giving you the records a beneficial-ownership review looks for.
How Osome Can Help
The end of the exemption gives founders and executives with mainland shareholdings a new 20% cost on every dividend. A Hong Kong holding company can reduce it, but only if it is set up and run properly from the start.
Osome helps startups, founders and growing businesses register a Hong Kong company and keep it compliant, with company secretary, accounting and tax support in one place. We work alongside your tax adviser to give your holding structure the statutory records, board minutes and annual filings that treaty claims depend on. More than 50,000 founders from over 150 countries already use Osome, which holds a 4.8-star Google rating.
Summary
The 20% rate is now a standing cost of holding mainland FIE shares in a personal name. It applies to every future payout, including profits earned during the exemption years. For most founders, the question is no longer whether to review their structure, but when.
Start by mapping the dates of your next distributions, since each one paid under the current structure carries the full rate. Then check whether the beneficial-ownership safe harbour covers you. If it does not, budget for real Hong Kong staff and governance rather than a mailbox entity, and take advice before moving any existing shares.
Ruth Dsouza Prabhu is a content developer passionate about shaping ideas into compelling narratives. Drawing on her experience in marketing communications and lifestyle writing, she brings clarity to complex business topics for entrepreneurs. Her work spans strategy, storytelling, and thought leadership, offering readers content that is both credible and impactful.
