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China: Clarification of tax position of Shanghai-Hong Kong Stock Connect programme and QFIIs/RQFIIs

Khoonming Ho
Lewis Lu
On the eve of the scheduled launch of the Shanghai-Hong Kong Stock Connect (Stock Connect) programme on November 17 2014, the Ministry of Finance, China Securities Regulatory Commission and the State Administration of Taxation, acting with the State Council's approval, jointly issued Circular 79 and Circular 81, announcing that foreign investors will be temporarily exempt from income tax on capital gains derived from the trading of A-shares under the programme, thereby providing much needed and welcomed tax certainty to investors. Under Stock Connect, international investors will be able to trade selected Shanghai-listed shares via the Hong Kong Stock Exchange (HKSE), and qualified mainland investors will be able to trade in Hong Kong shares via the Shanghai Stock Exchange (SSE).

A summary of tax implications for Hong Kong and foreign investors and PRC investors are set out in Table 1.

For qualified foreign institutional investors (QFIIs) and renminbi qualified foreign institutional investors (RQFIIs) that have historically realised A-share capital gains positions, in view of the now clear position that such gains are subject to CIT pursuant to Circular 79, it would be important for thoughts to be given to full tax settlement in China. In this regard, it could also be reasonably expected that PRC tax authorities would formulate more procedural and administrative guidance on tax settlement to make this process more user-friendly than it is at present.

Table 1

PRC corporate income tax (CIT)/Individual Income Tax (IIT)

PRC business taxStamp duty
Capital gainsDividends
Hong Kong and foreign investors investing in PRC shares via Stock Connect or QFII/RQFIIIndividuals/ CorporationsTemporarily exemptedWHT of 10% generally (subject to potential DTA relief)Temporarily exempted Seller subject to PRC stamp duty of 0.1% on sale of A-shares
QFIIs/ RQFIIsTemporarily exempted from CIT on gains derived from 17 November 2014 onwards; pre-November 17 2014 gains taxableExempted
PRC investors investing in HK shares via Stock ConnectIndividualsTemporarily exempted from IIT for three yearsIIT at 20%Temporarily exempted (existing rules)Subject to HK Stamp Duty of 0.1% on both sale and purchase of H shares
CorporationsCIT at 25%CIT at 25% (other than interest in qualifying H shares)Taxable or exempted (existing rules)

Time will tell as to when the "temporary" income tax exemption on capital gains may be re-evaluated by the State Council and other authorities, although indications are that the then prevailing capital market conditions and investor sentiment would be important factors to consider. The three-year IIT exemption granted in Circular 81 to Chinese individual investors trading Hong Kong listed shares via Stock Connect may serve as a good point of reference for the exemption period for foreign investors. Under current Chinese tax laws there are many cases of temporary tax treatments/incentives granted to different types of taxpayers, whereby a "temporary" treatment can be for an extensive period. For example, the existing IIT exemption for Chinese individuals trading A-shares was granted in 1998 as a temporary measure, yet remains operative today.

Khoonming Ho (
KPMG, China and Hong Kong SAR
Tel: +86 (10) 8508 7082

Lewis Lu (
KPMG, Central China
Tel: +86 (21) 2212 3421

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