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China-Hong Kong

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China Provides Tax Guidance for Shanghai-Hong Kong Stock Connect

On 17 November 2014, the rules provided under Circular (2014) 81 regarding taxation of gains and dividends from the Shanghai-Hong Kong Stock Connect program went into effect. The Connect program allows non-Chinese investors to invest in certain Shanghai listed A shares through Hong Kong securities firms, and Chinese investors to invest in certain Hong Kong listed shares through Chinese securities firms.

The following outlines the main rules concerning Chinese tax liabilities:

Hong Kong and Foreign Investors

  • Hong Kong and foreign investors are temporarily exempt from Chinese income tax on gains from the sale of A shares through the program.
  • Hong Kong and foreign investors are subject to normal 10% withholding tax on dividends received from A shares, which must be withheld and paid by the listed Chinese company paying the dividends.
  • When an investor is tax resident in a third country with which China has entered into a tax treaty, the investor may apply for the beneficial dividend withholding tax rate provided for in the treaty. The benefit is provided in the form of a refund upon approval.

Chinese Investors

  • Corporate Chinese investors are subject to standard Chinese enterprise income tax (EIT 25%) on both gains from the sale of Hong Kong shares and dividends received under the program. However, an exemption applies for dividends from shares of domestic Chinese companies traded on the Hong Kong Stock Exchange (H shares) that have been held for at least 12 consecutive months.
  • Individual Chinese investors are exempt from individual income tax on gains from the sale of Hong Kong shares through the program until 16 November 2017. Dividends received by Individual Chinese investors from Hong Kong shares are subject to 20% individual income tax.
  • Both Corporate and Individual Chinese investors may claim a foreign tax credit for foreign tax paid in connection with dividends received under the program.

Business Tax and Stamp Duty

Both Chinese and Hong Kong investors are temporarily exempt from business tax on gains from the sale of shares through the program. Stamp duty applies as per standard rules in each jurisdiction for the purchase, sale, inheritance, or donation of shares.

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