【Wealthy CityLinkers】Foreign Individual Dividend Tax Exemption Ends: Status Clarity as the Planning Starting Point
Dividends and bonuses obtained by foreign individuals from foreign-invested enterprises are no longer exempt from individual income tax and must be paid at a rate of 20%. Enterprises must withhold and remit the tax when making payments; retained earnings accumulated in the past but not yet distributed, if distributed after September 1, will in principle also fall within the scope of taxation.
Qualified Party Can Seek 10% Dividend Tax Rate
“Foreign individuals” under Announcement No. 27 are not equivalent to “tax non-residents.” If a foreign national is a Hong Kong tax resident and meets the applicable conditions of the “Mainland and Hong Kong Tax Arrangement,” they may still apply for the arrangement’s preferential treatment in respect of Mainland-sourced dividends; the dividend tax rate for ordinary individual shareholders can generally be reduced from 20% under Mainland law to 10%.
However, a Hong Kong permanent identity card is not an automatic proof of Hong Kong tax resident status. Cardholders who have long conducted business in the Mainland should assess their tax resident status in both places based on their actual circumstances, such as residence, family and economic interests, and should apply early to the Hong Kong Inland Revenue Department for a “Certificate of Resident Status.” If the relevant certificate cannot be provided or the conditions of the arrangement are not met, the Mainland foreign-invested enterprise may still be required to withhold individual income tax at 20% when paying dividends.
Changing to Shareholding by a HK Company May Reduce the Tax Rate to 5%
If the direct shareholder of the domestic company is changed to a Hong Kong company, Mainland dividends generally shift to the issue of withholding income tax on non-resident enterprise dividends: under Mainland law it is usually 10%, and if the conditions of the “Mainland and Hong Kong Tax Arrangement” are met, it may be reduced to 5%.
However, restructuring may immediately trigger tax costs. When an individual transfers domestic equity to a Hong Kong company, individual income tax of 20% may usually arise; transfers at unreasonably low prices may also be adjusted. A newly established Hong Kong holding company may not immediately meet the shareholding period requirements for the preferential tax rate; if it lacks substantive management and commercial functions and is set up merely to obtain preferential treatment, it may also be challenged by the beneficial owner and anti-avoidance rules.
Whether to change to corporate shareholding should compare restructuring tax burdens, establishment and maintenance costs, shareholding period restrictions, and the tax-saving benefits and time value of future continuous dividends. For small or occasional dividends, restructuring may not be worthwhile; for family enterprises with long-term holdings, stable dividends and larger scale, a quantitative assessment is worthwhile.
The core of this adjustment is not merely that the tax rate has changed from 0 to 20%, but that the practice of foreign individuals relying on historical preferences for passive tax exemption has come to an end. In the future, 20% is the general rule; those who meet the conditions and complete the filing procedures can seek 10%; only those with a compliant holding structure, shareholding period and commercial substance may further consider 5%.
CityLinkers Group, Partner, Paxson Fung
For original article, please visit: https://www.hkcd.com.hk/content_app/2026-09/16/content_8775431.html
