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Shenzhen-Hong Kong Stock Connect Taxes Explained

by Mary Swire, Lowtax.net, Hong Kong
30 September, 2016

As part of its marketing plan for the proposed Shenzhen-Hong Kong Stock Connect (Shenzhen Connect), Hong Kong Exchanges and Clearing Limited (HKEX) has published a revised Information Book, and Frequently Asked Questions, covering business and operational details, and including a summary of applicable fees and taxes.

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

Hong Kong and overseas investors will be subject to Mainland fees, including a transfer fee of 0.002 percent on both sides of a transaction, and a 0.1 percent stamp duty only on the seller's side. In the Mainland, trading and clearing related fees and taxes are paid at the same time as the transaction consideration.

It is also noted however that, with regard to securities acquired by Hong Kong and overseas investors through Shenzhen Connect, cash dividends and bonus issues to investors will be subject to dividend withholding tax at a standard rate of 10 percent. It is pointed out that 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 the Shanghai-Hong Kong Stock Connect. The same exemption is expected to apply to trading through the 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).

HKEX expects the Hong Kong market should be ready for the implementation of the Shenzhen Connect in the second half of November this year. However, its commencement remains subject to final approval by the China Securities Regulatory Commission and the Hong Kong Securities and Futures Commission.

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