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To achieve a mutual market access between Hong Kong and Mainland China, the highly anticipated Shanghai-Hong Kong Stock Connect pilot programme (“Stock Connect”) was launched on 17 November 2014. Stock Connect establishes a “northbound trading link” (allowing Hong Kong investors to trade designated securities listed in Shanghai) and a “southbound trading link” (allowing Mainland investors to trade designated securities listed in Hong Kong). This link-up marks another milestone in China’s drive to expand its connection with the international financial system and transform its currency into a global investment medium.
While Stock Connect could unleash a wealth of new opportunities for investors and companies, investors should understand the related taxation issues in order to leverage on the opportunities of this cutting-edge initiative.
Key tax implications of the “northbound trading link”
For Hong Kong and overseas investors investing in securities listed in Mainland via Stock Connect, there should be no Hong Kong profits tax exposure on dividend income and disposal gains as the income is generally regarded as offshore/ capital in nature and hence non-taxable. In addition, the transfer of securities listed in China will not be subject to Hong Kong stamp duty.
The People’s Republic of China (PRC) tax treatments of Stock Connect and Qualified Foreign Institutional Investors, QFIIs/ Renminbi Qualified Foreign Institutional Investors, RQFIIs were clarified in the tax circulars Caishui [2014] No. 81 (“Circular 81”) and Caishui [2014] No. 79.
The PRC tax implications of investing in shares listed in China are summarized in the next page:
Key tax implications of the “southbound trading link”
The “southbound trading link” under Stock Connect allows Mainland institutional investors and those individual investors who satisfy the eligibility criteria (i.e. Individual investors who hold an aggregate balance of not less than RMB500,000 in their securities and cash accounts) to trade designated securities listed in Hong Kong.
For Mainland investors investing in Hong Kong securities via Stock Connect, the Hong Kong profits tax exposure should be negligible. These investors will not be subject to Hong Kong profits tax as long as they do not conduct any trade or business in Hong Kong. In addition, Hong Kong currently does not levy any withholding tax on dividends or capital gains derived by non-residents. However, the transfer of securities listed in Hong Kong will be subject to Hong Kong stamp duty of 0.1% on both the sale and purchase of securities. The PRC tax implications of investing in shares listed in Hong Kong (as per Circular 81) are summarized below:
