In order to improve welfare and stem social tensions, the Chinese government had decided to overhaul its tax rules. After 19 years, the 20 per cent tax exemption on incomes from equity dividends in foreign-funded companies will be eliminated. State enterprises will also have to contribute a greater share of profits, five per cent above current levels. Analysts agree changes are good but will wait to see if they are implemented.

Beijing (AsiaNews) - China will end a preferential policy on expatriates' tax payments for income from dividends, as part of reforms to improve welfare and in recognition of the role played by domestic investors.  This is part of the government's plan to reduce the widening wealth gap.

Foreigners have been exempted from a 20 per cent tax on their incomes from equity dividends in foreign-funded companies, a policy started in 1994 to encourage foreign investment in China.

Over the years, the exemption attracted businessmen as well as specialists and teachers who have contributed to the country's know-how.

The end of the practice will help China's welfare system, badly affected by the government's one-child policy and an aging population, sources in Beijing said.

Liu Tianyong, director of the Beijing law firm Hwuason Lawyers, said the preferential treatment was outdated and need to be revised.

"It is unwise to continue a preferential offer because some foreign-registered investors have started to transfer their profits out of the country," he said.

On 5 January, the State Council (cabinet) approved a guideline with 35 measures designed to balance the country's system of distributing wealth to narrow the gap between urban elites and the rural poor.

This follows new orientations laid down by the politburo, the main decision-making body in Communist China, under the direction of Xi Jinping, who will become the country's new president in March.

In addition to an end to exemption for foreigners, the authorities plan to improve wages. The latter will be raised and state-owned enterprises will be required to hand over a greater share of their profits.

The planned reform had been delayed by about eight years, after being amended half a dozen times amid strong objections from interest groups related to state-owned companies and some government bodies.

With China's social inequality reaching alarming proportions, Prime Minister Wen Jiabao in March pledged that rolling out the guidelines would be a top priority before he stepped down.

By 2015, enterprises owned by the central government will be required to surrender a greater share of profits-five percentage points over current levels-to the government, which will go to improve wages and retirement plans.

"The broad ideas are correct. However, the key is how to implement them," said Li Shi, a professor at Beijing Normal University.

• china
• tax
• reforms
• foreign
• investors