November 2014 - Shanghai-Hong Kong Stock Connect Programme

It is a securities trading and clearing links programme jointly developed by The Hong Kong Exchange and Clearing Limited, Shanghai Stock Exchange (“SSE”) and China Securities Depository and Clearing Corporation Limited, which aims to achieve mutual market access between Hong Kong and the Mainland.

Under the Programme, all Hong Kong and overseas investors (including individuals and corporations) in the Hong Kong market (“Hong Kong Investors”) are able to trade and hold a specified range of stocks listed on the SSE (“Northbound Trading”) while the eligible Mainland investors are allowed to trade and hold  designated stocks listed on the Hong Kong Stock Exchange (“SEHK securities”) (“Southbound Trading”).  In the initial stage of the Programme, an Aggregate Quota and a Daily Quota have been set separately for Northbound Trading and Southbound Trading.  The Aggregate Quota and Daily Quota are set at RMB300 billion and RMB13 billion respectively for Northbound Trading and at RMB250 billion and RMB10.5 billion respectively for Southbound Trading.

The following is a summary of the Hong Kong and PRC tax implications of the Hong Kong and Mainland investors who participate in the Northbound and Southbound Trading activities.

Hong Kong tax implications on Southbound Trading activities

Hong Kong Income Tax

The Hong Kong income tax exposure on the Mainland investors for investing in SEHK securities is relatively low.  Hong Kong does not impose withholding tax on capital gains and dividends derived by non-Hong Kong resident persons.  In Hong Kong, profits tax is charged on every person who carries on a trade, profession or business in Hong Kong in respect of his assessable profits arising in or derived from Hong Kong for that year from such trade, profession or business.  Gains from sale of capital assets are specifically excluded from the charge. Therefore, generally speaking, if the Mainland investors do not carry on a trade or business in share dealing activities in Hong Kong, dividend income and gain on disposals of SEHK securities should not be subject to Hong Kong profits tax.

Hong Kong Stamp Duty

The Mainland investors should be subject to Hong Kong Stamp Duty at 0.1% on sale or purchase of SEHK securities.

PRC tax implications

The State Administration of Taxation, Ministry of Finance and the China Securities Regulatory Commission have jointly issued Caishui [2014] 81 on 31 October 2014 to clarify the PRC Tax treatment of the Programme. 

For Southbound Trading

Gains on disposal

The Mainland individual investors are temporarily exempted from PRC Individual Income Tax on gains on disposal of SEHK securities for a 3-year period ending on 16 November 2017.  For Mainland corporate investors, the gains should be included in their total income and subject to Enterprise Income Tax.

Dividends

Dividends derived from SEHK securities by the Mainland individual investors will be subject to Individual Income Tax at 20% whereas dividends from SEHK securities derived by the Mainland corporate investors should normally be included in their total income and subject to Enterprise Income Tax unless the corporate investors have held the securities for not less than 12 months.  

For Northbound Trading

Gains on disposal

Hong Kong Investors are temporarily exempted from income tax on gains on disposal of A-Shares.  

Dividends

Hong Kong Investors will be subject to income tax at 10% on dividends derived from A-shares.  If the investors are eligible for a lower withholding tax rate on dividends under a tax treaty, he could apply to the Mainland tax authority for a refund. 

Business Tax

Hong Kong Investors and the Mainland individual investors are temporarily exempted from business tax on gains derived from trading activities under the Programme.  

Stamp Duty

Hong Kong Investors are subject to PRC stamp duty under the prevailing regulations in the Mainland, i.e. at 0.1% on sale of A-shares under the Programme.   Please note that the purchase of A-shares is not subject to PRC Stamp Duty.