Investors confused by capital gains rules for selling shares
The mainland's corporate income tax law (CIT), introduced in January 2008, has left foreign investors in a quandary about their tax position. Specifically, confusion reigns over the applicability of capital gains derived from the disposal of A- and H-shares.
A-shares are shares in mainland-listed corporations that foreign investors can only buy via the Qualified Foreign Institutional Investors scheme. H-shares are shares in Hong Kong-listed mainland corporations that can be bought directly by foreign investors. The uncertainty stems from the fact that, before the introduction of the CIT, foreign investors were specifically exempted from mainland withholding tax on capital gains arising from the disposal of H-shares. There was no such specific exemption for capital gains derived on A-shares but, as a matter of practice, mainland tax authorities have not actively enforced such tax payment.
After implementation of the CIT, the specific tax exemption applicable to H-shares has been repealed and the technical position is that H- and A-share capital gains are subject to mainland withholding tax at the general rate of 10 per cent, subject to double tax treaty relief.
According to Christopher Xing, partner for China tax at KPMG China, withholding tax on capital gains on A- and H-shares has not been subject to active enforcement and collection by tax authorities - with a few exceptions.
Lobbying of the State Administration of Taxation (SAT) and the Ministry of Finance (MOF) by financial industry players and the accounting profession has not yet succeeded in introducing a specific tax exemption on A- and H-share capital gains.
'Given the significant impact of this issue on foreign investors' potential returns on A- and H-share investments, we are hopeful that the SAT and the MOF will give due consideration to foreign investors' concerns, and the need for certainty to be introduced in this area of the tax law,' Xing says.
According to Danny Yiu, Beijing partner with PricewaterhouseCoopers, foreign investors should use investment vehicles in jurisdictions that have entered into double tax treaties with the mainland. This is because the application of the mainland's general 10 per cent withholding tax on capital gains derived from their disposal of A- and H-shares could be mitigated or reduced if they are tax resident in a jurisdiction that has entered into a treaty.
They could apply for double tax treaty relief. 'They should consult their own tax advisers to see whether a particular double tax treaty would offer capital gains tax protection under their specific facts,' he says.