SHANGHAI/HONG KONG, Nov 14 (Reuters): China will temporarily exempt taxes on profits made from a landmark scheme linking the Shanghai and Hong Kong stock exchanges, the finance ministry said on Friday, removing a potential stumbling block for global investors eager to directly buy Chinese stocks for the first time.
Market players cheered the announcement, though Chinese regulators left themselves wiggle room to apply a tax to foreign investors at a later date.
The Shanghai-Hong Kong stock connect, to be launched on Nov. 17, will let international investors trade Shanghai-listed shares via the Hong Kong stock exchange, and mainland investors to trade in Hong Kong shares via the Shanghai Stock Exchange.
While the programme will be constrained by quotas initially, analysts say it has the potential to create the world's third-largest stock market if the two boards are fully integrated. But there have been major concerns over implementation, the impact of pro-democracy protests in Hong Kong, and tax policy for the scheme.
Clarity on tax policy had been anxiously awaited, especially as the programme is set to launch on Monday.
Individuals and companies in Hong Kong buying shares in Shanghai will be temporarily exempted from paying income tax on gains for an unspecified period.
China's exemption of capital gains taxes "removes a huge concern for investors and brokers," said Nick Ronalds, head of equities for the Asia Securities Industry & Financial Markets Association in Hong Kong.
"Launching the scheme with tax uncertainty looming would have been a major obstacle for investors and removes a big source of risk and uncertainty," he said.
Beijing's statement said that mainland individuals buying shares in Hong Kong through the programme would be exempt from income tax for three years, but will be liable for tax on dividends.
The statement also said that business tax on Qualified Foreign Institutional Investor (QFII) and Renminbi Qualified Foreign Institutional Investor (RQFII) schemes - the two main avenues currently available for foreigners to invest in Chinese stocks - will also be temporarily exempted.
Mainland companies will be taxed on profits and dividends earned through the scheme, based on China's Enterprise Income Tax law, according to a Q&A that the Finance Ministry issued along with its announcement.
However, tax experts say that this law doesn't directly apply a separate tax to profits from share sales.
Investors on both sides will be liable for stamp duties, and Hong Kong investors will be taxed 10 per cent on dividends earned from mainland investments, according to the announcement.
In the Q&A, the ministry said that the goal of the tax policy was to support development of the connect scheme, promote liberalisation of the capital account and create fair tax treatment for investors under the connector and the QFII/RQFII schemes.
