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Tax Breaks Confirmed For New Shenzhen-HK Stock Connect Scheme

by Mary Swire, Lowtax.net, Hong Kong
06 December, 2016

The Shenzhen-Hong Kong Stock Connect (Shenzhen Connect) program, which further opens up Mainland China's markets for international and Hong Kong investors, was successfully launched on December 5.

The new stock link is similar to the Shanghai-Hong Kong Stock Connect (Shanghai Connect), which began trading in November 2014. Shenzhen Connect will enable Mainland 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.

The expanded list of eligible stocks is intended to offer international and Hong Kong investors direct access to most companies traded in the Mainland for the first time. There are also more choices for Mainland investors, with 100 small cap stocks listed in Hong Kong now available through Shenzhen Connect.

At the launch of Shenzhen Connect, Hong Kong's Chief Executive C Y Leung said that it "will facilitate the Mainland's capital markets reforms, and help promote the internationalization of Renminbi (RMB). As for Hong Kong, this new platform will surely attract investors eyeing opportunities in the Mainland, bolstering our position as an international financial center, and a global offshore RMB business hub."

Hong Kong Exchanges and Clearing Limited's Chief Executive, Charles Li, added that "Shenzhen Connect proves the Connect program is not only flexible and scalable but also an important part of Hong Kong's market infrastructure and our strategy for the long term. By broadening mutual market access, overseas investors can make use of Hong Kong as a convenient access point to Mainland China, while Mainland investors can use Hong Kong as their first stop as they begin to diversify their assets beyond Mainland China's borders."

On December 1, before the launch of Shenzhen Connect, China's Ministry of Finance confirmed the tax framework for investments through the program. As for trading through Shanghai Connect, Hong Kong and overseas investors are exempted from paying both capital gains and income taxes when they trade through Shenzhen Connect, particularly as the China-Hong Kong double taxation agreement (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).

However, cash dividends and bonus issues to Hong Kong and overseas investors from Chinese securities are still subject to dividend withholding tax at the standard rate of 10 percent. A resident of a country that has entered into a DTA with China may be eligible for a lower dividend tax rate.

With regard to Mainland individual investors trading in Hong Kong securities, they are exempted from capital gains and income tax for an initial period from December 5, 2016, until December 4, 2019, to mirror the tax break granted to Hong Kong and overseas investors, but will still pay a 20 percent dividend withholding tax. Trading profits made by Mainland institutional investors will still be liable for corporate income tax.

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