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Khoonming Ho |
Lewis Lu |
On November 16 2012, the Ministry of Finance, the State Administration of Taxation and the China Securities Regulatory Commission jointly issued Cai Shui [2012] No.85 (Circular 85), making adjustments to the existing individual income tax (IIT) incentive for dividends received by individual investors from companies listed in the Shanghai and Shenzhen Stock Exchanges (listed companies). Circular 85 came into effect on January 1 2013. A major change to the IIT incentive in Circular 85 is the introduction of differentiated IIT policy for dividend income based on holding period. Table 1 shows the different IIT treatment of dividends from listed companies under the current and new rules.
Circular 85 introduces a more complex IIT withholding mechanism for individual investors, which will significantly increase the administrative burden of listed companies and security brokerage firms in China. Upon dividend distribution, listed companies shall withhold and remit IIT on 25% of the payout to the individual investors. For an individual who disposes the shares within one year of acquisition, the security brokerage firm shall calculate the IIT due on dividend income based on the individual investor's actual holding period, deduct any additional IIT due (if any) on the dividend from the individual's investment account, and remit the fund to the listed company. This additional withholding should occur within five working days following the end of the month when the individual investor transfers the listed shares. The listed company shall then report and settle the additional IIT with the tax authority in charge within the statutory timeline.
Table 1 |
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Holding period |
Taxable income |
Effective IIT rate |
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Current rule |
New rule |
Current rule |
New rule |
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< 1month |
50% of the dividend income |
100% of the dividend income |
10% |
20% |
> 1month and = one year |
50% of the dividend income |
10% |
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> 1 year |
25% of the dividend income |
5% |
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Circular 85 was issued with the intention of fostering long-term stability in the Chinese stock markets by reducing tax burdens on long-term investors and at the same time discouraging short-term speculation. It is another step closer to a sophisticated personal tax system for China. This is achieved through taxing individuals based on their investment horizon by imposing tax on dividends at a standard rate of 20%, lowering the tax rate to 10% for investors who hold the shares for more than one month but no more than one year, and further reducing the rate to 5% if the investors hold the shares for more than one year. It is expected that the new IIT collection rules will encourage individuals to invest in quality stocks with high dividend payout, and discourage senior executives of listed companies to cash out on their management shares prematurely.
Khoonming Ho (khoonming.ho@kpmg.com)
Tel: +86 (10) 8508 7082
Lewis Lu (lewis.lu@kpmg.com)
Tel: +86 (21) 2212 3421
KPMG
Website: www.kpmg.com
