BEIJING: China will temporarily exempt taxes on profits made from a landmark scheme linking Shanghai and Hong Kong stock exchanges, the finance ministry said on Friday, removing a potential stumbling block for global investors eager to directly buy Chinese stocks for the first time.
The Shanghai-HK stock connect, to be launched on Nov 17, will allow international investors to trade Shanghai-listed shares via the HK stock exchange, and mainland investors to trade in HK shares via the Shanghai Stock Exchange.
Investors had been waiting to learn how proceeds from the trading would be taxed.
The ministry said in a statement that business tax on Qualified Foreign Institutional Investor (QFII) and Renminbi Qualified Foreign Institutional Investor (RQFII) schemes, the two main avenues currently available for foreigners to invest in Chinese stocks, would also be temporarily exempted from tax on income derived from those programmes.
The statement said that the goal was to support development of the connect scheme, promote liberalisation of the capital account and create fair tax treatment for investors under the connector and the QFII/RQFII schemes.
It did not specify for how long the exemption would last.
The statement did say that mainland investors would be exempted from income tax for three years when investing in HK shares.
Brokers and investors had feared the scheme could be subject to the country's 10% tax on profits made by non-resident institutions, which some said would dampen trading volumes.
In a letter to China's State Administration of Taxation in August, the Hong Kong-based Asia Securities Industry & Financial Markets Association said tax would be a "critical feature of the success" of the scheme. It added that any uncertainty over tax "effectively constitutes a cost that would reduce participation."
Global investors had also been eagerly awaiting clarity on tax rules because any decision on stock connect is expected to have implications for other existing China investment schemes.
Mainland investors have been hesitant to invest in overseas stocks through the current Qualified Domestic Institutional Investor (QDII) scheme, which allows Chinese stock punters to buy shares overseas through mutual funds operating under quotas. – Reuters
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