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China Released Tax Policy for Shenzhen-Hong Kong Stock Connect

2016.12.05 CHENG, Hong (Julie)、Christine Yuan

On December 1, 2016, the Ministry of Finance, the State Administration of Taxation and China Securities Regulatory Commission jointly released the Circular on Tax Policy relating to the Pilot Program of Shenzhen-Hong Kong Stock Connect (CaiShui [2016] 127, “Circular 127”).  Circular 127 has clarified the income tax, value-added tax and securities (stock) stamp duty treatment in respect to the Pilot Program for the Shenzhen-Hong Kong Stock Connect (“SZ-HK Stock Connect”). Circular 127 will become effective on December 5, 2016 when the SZ-HK Stock Connect is officially launched. 


1. Background of Circular 127


The SZ-HK Stock Connect is a mechanism which links the securities trading and clearing between Hong Kong Exchanges and Clearing Limited (“HKEx”) and the Shenzhen Stock Exchange (“SSE”) and follows the successful launch of the Shanghai-Hong Kong Stock Connect in 2014. It enables investors in the Mainland to trade certain stocks listed on HKEx and investors in the Hong Kong market to trade certain stocks on SSE. 


Before the release of Circular 127, Mainland and Hong Kong investors were preoccupied with the tax treatment of the SZ-HK Stock Connect. Circular 127 clarified that investors trading through SZ-HK Stock Connect would be subject to a similar tax preferential treatment as the Shanghai-Hong Kong Stock Connect, to facilitate the smooth implementation of the Stock Connect mechanism.  


2. Highlights of Circular 127


Pursuant to Circular 127, the tax treatment of trading stocks through the SZ-HK Stock Connect by both Mainland investors and Hong Kong/overseas investors is summarized below. 


1. Income Tax on Capital Gains Received from the Transfer of Stocks  


  • Mainland individual investors investing on HKEx: temporary exemption within the stipulated period (December 5, 2016 to December 4, 2019).

  • Mainland enterprise investors investing on HKEx: subject to enterprise income tax at the applicable rate. 

  • Hong Kong/overseas investors (including individual investors and enterprise investors) investing in A-shares: temporary exemption, without a sunset provision.


2. Income Tax on Dividends 


  • Mainland individual investors investing on HKEx: withholding tax at the rate of 20%, to be withheld by H-share companies for dividends paid by H-share companies, and China Securities Depository and Clearing Corporation Limited (“CSDC”) for dividends paid by non-H-share companies.

  • Mainland enterprise investors investing on HKEx: subject to enterprise income tax at applicable rate; exemption if holding H-shares for 12 consecutive months or longer.

  • Hong Kong/overseas investors (including individual investors and enterprise investors) investing in A-shares: withholding tax at the rate of 10%, to be withheld by A-share companies; investors that are eligible to enjoy favorable tax treaty treatment may claim tax refunds.


3. Value-Added Tax on Net Capital Gains from the Transfer of Stocks 


  • Mainland individual investors investing on HKEx: temporary exemption. 

  • Mainland enterprise investors investing on HKEx: will be taxed or exempted from tax under the current rules. 

  • Hong Kong/overseas investors investing in A-shares: temporary exemption. 


4. Securities (Stock) Stamp Duty 


  • Mainland investors investing on HKEx: subject to stamp duty pursuant to HK tax law. 

  • Hong Kong/overseas investors investing in A-shares: subject to stamp duty pursuant to PRC tax law. 

  • Hong Kong/overseas investors engaged in short selling through the Shenzhen-Hong Kong Stock Connect or the Shanghai-Hong Kong Stock Connect: temporary exemption for borrowing and returning A-shares.

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