||Ayesha Macpherson Lau
The Shenzhen-Hong Kong Stock Connect cross-border share
trading mechanism commenced operation on December 5 2016.
This complements the Shanghai-Hong Kong Stock Connect
mechanism, in place since November 2014, and enables
international investors to trade selected A-shares, listed on
the Shenzhen Stock Exchange (SSE), via the Hong Kong Stock
Exchange (HKSE). It also allows qualified mainland investors to
trade in HKSE-listed shares via the SSE.
To facilitate cross-border investment activity, and in a
similar manner to the Shanghai-Hong Kong Stock Connect,
preferential Chinese tax treatments have been clarified.
On November 5 2016, the Ministry of Finance, China State
Administration of Taxation (SAT) and the China Securities
Regulatory Commission (CSRC) issued Circular 127. It announced
temporary exemptions from Chinese income taxes (corporate and
individual income tax) and value added tax (VAT) for trading
gains arising to foreign investors on SSE-listed shares when
transacted through the Shenzhen-Hong Kong Stock Connect.
Going in the other direction, temporary income tax and VAT
exemptions were also provided for the trading gains of Chinese
investors arising from HKSE-listed shares when transacted
through the Shenzhen-Hong Kong Stock Connect (though the income
tax exemption only extends to Chinese individuals and not
Chinese corporations). Dividend income continues to be fully
subject to tax, though the foreign investors can potentially
access treaty relief.
The preferential tax treatments for Stock Connect trading
gains sit alongside existing corporate income tax exemptions
for A-share trading gains realised by foreign investors through
the qualified foreign institutional investor (QFII) and
renminbi QFII (RQFII) programmes. QFII and RQFII, operating
more broadly than Stock Connect, also allow investment in other
forms of listed investment (e.g. bonds, futures, units in
Chinese mutual funds). No special VAT or income tax treatment
is provided for these non A-share investments and, therefore,
careful planning and the use of tax treaties, where available,
are still needed.
Khoonming Ho (firstname.lastname@example.org)
and Ayesha Macpherson Lau (email@example.com)
Tel: +86 (10) 8508 7082 and +852 2826 7165