|Khoonming Ho||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.
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