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Shenzhen-Hong Kong Stock Connect Poised To Launch

by Mary Swire, Lowtax.net, Hong Kong
13 October, 2016

The Shenzhen-Hong Kong Stock Connect initiative was given the green light by the involved stock exchanges on October 11.

The new stock link is similar to Shanghai-Hong Kong Stock Connect (Shanghai Connect), which was launched in November 2014. It will enable Mainland Chinese investors to trade stocks listed on the Hong Kong Exchange (SEHK) directly through the Shenzhen Stock Exchange (SZSE), and for Hong Kong and overseas investors to trade stocks listed on the SZSE directly through the SEHK.

It was established under a new agreement between the Shenzhen Stock Exchange, the Stock Exchange of Hong Kong, China Securities Depository and Clearing Corp, and Hong Kong Securities Clearing Co.

"Shenzhen Connect is a major policy initiative by the Mainland Government to promote reform and opening-up in the capital market," said SZSE Chairman Wu Lijun. "The four-party Agreement is an important milestone which represents a consensus on the trading and clearing mechanisms between the two exchanges and two clearing houses. It is also the basis and pre-condition for various other agreements for the implementation of Shenzhen Connect, … paving the way for the early launch of the initiative."

Information already issued has provided a summary of the applicable tax framework for investments through Shenzhen Connect. For example, with regard to Chinese securities acquired by Hong Kong and overseas investors, cash dividends and bonus issues to investors will be subject to dividend withholding tax at a standard rate of 10 percent. A resident of a country that has entered into a double taxation agreement (DTA) with China may be eligible for a lower dividend tax rate.

Hong Kong and overseas investors are exempted from paying both capital gains tax and business tax when they trade through Shanghai Connect. These same exemptions are expected to apply to trading through Shenzhen Connect, particularly as the China-Hong Kong DTA confirms that capital gains derived by a Hong Kong resident from the sale and purchase of shares in a Mainland-listed company will be taxable only in Hong Kong (where there is no such tax).

To ensure the new systems for Shenzhen Connect are implemented smoothly, the SZSE and SEHK will carry out simulation tests starting on October 17 until November 9. Subject to successful testing and further preparations, and the receipt of final approval from regulatory authorities, it is expected to launch in mid-November this year.

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