China will impose a 20 percent individual income tax on dividends and bonuses that foreign individuals receive from foreign-invested enterprises starting September 1, according to a joint announcement from the Ministry of Finance and the State Taxation Administration on September 1.

Under China's individual income tax law, individuals have long been required to pay 20 percent tax on dividend and bonus income. To encourage reform and opening-up and attract foreign investment, China had granted a temporary exemption on such income for foreign individuals since 1994.

The tax waiver, which has been in place for over three decades, played a positive role in attracting foreign capital during a specific phase of development, said Liu Yi, director of the China Center for Public Finance and Taxation at Peking University.

However, as China accelerates the building of a high-standard socialist market economy, foreign investors now pay more attention to the overall business environment, including the rule of law, market scale and industrial supporting facilities, Liu added.

Therefore, relying on unbalanced tax policies between domestic and foreign-invested enterprises to attract foreign capital is no longer compatible with the new situation and new requirements, Liu said.

Drawing on international experience, Li Xuhong, vice president of the Beijing National Accounting Institute, noted that when an economy reaches a certain stage of development, it generally no longer depends on tax incentives to draw foreign investment, but instead focuses on creating a stable, sound and fair market environment.

The move is conducive to maintaining fairness and uniformity of the tax system, fostering a healthier environment for foreign investment, plugging tax loopholes and advancing the construction of a unified national market, she added.