China Confirms Capital Gains Tax Exemptions for QFIIs, RQFIIs and the Shanghai-Hong Kong Stock Connect Scheme

November 14, 2014

BEIJING - China today issued two notices releasing details of its long-awaited tax policies for Qualified Foreign Institutional Investors (“QFIIs”), RMB Qualified Foreign Institutional Investors (“RQFIIs”) and the Shanghai-Hong Kong Stock Connect scheme (“SHSC Scheme”). The SHSC Scheme will formally launch on November 17 In a Client Alert, lawyers Baker & McKenzie offer the following summary:

Effective November 17, capital gains derived by a QFII and a RQFII from the sales of shares in a Chinese resident enterprise are exempt from enterprise income tax (“EIT”). The exemption will not apply to capital gains from transactions before November 17, 2014, and the notice specifically provides that EIT applies to past transactions.
Similarly, effective from November 17 capital gains derived by either resident or non-resident enterprises and individuals, through the SHSC Scheme, from the sales of A shares traded in the Shanghai Stock Exchange are exempt from income tax. In addition, net revenue derived by either resident or non-resident enterprises and individuals through the SHSC Scheme from sales of A shares traded in the SSE are exempt from business tax.
However, consistent with the tax policies provided for QFIIs under a prior notice, dividends derived by either resident or non-resident enterprises and individuals that invest in A Shares through the SHSC Scheme will be subject to 10% withholding tax. The Chinese listed companies will be responsible for the withholding.
From November 17, 2014 to November 16, 2017, capital gains derived by Chinese individuals, through the SHSC Scheme, from the sales of shares traded in the Stock Exchange of Hong Kong  are also exempt from individual income tax. However, capital gains derived by Chinese resident enterprises, through the SHSC Scheme, from sales of shares traded in the SEHK will be subject to EIT at applicable rates.
There are no stamp duty exemptions, and both foreign investors and domestic investors under the SHSC Scheme will be subject to stamp duty in accordance with Chinese and Hong Kong laws Currently, 0.1% Chinese stamp duty has been imposed on the transferors for A share transfer documents concluded in sales and purchases, inheritance and donations. www.bakermckenzie.com (ATI).