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China said to levy capital gain tax on foreign stock investors
Online Edition
CHINA is planning to levy tax on capital gains derived from trading of domestic securities by foreign fund managers during the five years through November 2014, a move that may result in a large reduction in foreign funds.
Qualified Foreign Institutional Investors and Renminbi Qualified Foreign Institutional Investors will be required to pay a 10 percent tax on profits realized from investment in mainland securities between November 17, 2009 and November 16, 2014, the Economic Observer reported today, citing a briefing given to fund managers, custodians and accountants in Beijing yesterday by the Asset Management Association of China.
Tax authorities in Beijing, Shanghai and Shenzhen will collect taxes on gains made by QFII and RQFII funds from investment in equities, mutual funds, warrants and stock index futures, while gains from debt securities investment won’t be taxed. Multi-asset investments will be treated as equity investments, and taxes on convertible bonds won’t be levied until it is converted, the report said.
Taxes will be levied on individual transactions rather than net gains of multiple trades, according to the report.
China-based Z-Ben Advisors estimated that, in order to pay the bills, managers of public funds might need to claw back as much as US$3billion to US$4 billion from investment funds with an approximately US$30 billion in net asset value.
“The move could seriously discourage investors’ interest in QFII-backed funds for the remainder of the year,” the consulting firm said in an emailed note.
“But in the longer term, tax certainty is better for everyone,” it added.
Under the current regulations, a QFII participant is exempt from the 5 percent business tax on investment gains but is required to pay a 10 percent corporate income tax on dividends and bonuses gained in China.
Talk about China introducing a capital gains tax on QFII investors persists since the program was launched in 2003. The uncertainty forces many QFII investors to set aside funds from their profits for possible future taxation.
In November, China granted a temporary tax waiver of capital gains for an unspecified period to QFII and RQFII investors as well as international investors buying mainland shares via the stock trading link between Shanghai and Hong Kong in a bid to boost foreign participation in the country’s capital market.
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