Foreign banks will be charged 33 per cent income tax for conducting yuan transactions in China, according to a joint notice by the Ministry of Finance, the State Administration of Taxation and the People's Bank of China.
Approved by the State Council, the notice said foreign banks, which are confined to performing yuan business in Pudong, Shanghai, would have to separate its yuan and foreign exchange businesses, which were subject to different tax rates.
The yuan business will be charged 33 per cent income tax at par with domestic banks, while the foreign exchange business will be levied in accordance the taxation rules governing foreign-invested enterprises, or at 15 per cent.
Xinhua (the New China News Agency) said the foreign banks would not enjoy the taxation preferential policy of 'one-year exemption and two-year reduction' for their income from yuan business.
They will also be charged the same business tax rate as domestic financial enterprises.
Analysts said foreign banks faced severe restrictions on yuan operations, and if the tax rate was raised to 33 per cent it would be nearly impossible for them to make money.
The harshest restriction forbids the banks from accepting deposits from, or making loans to, mainland firms and individuals, effectively depriving them of a ready source of yuan. Nine foreign banks have been allowed to conduct the yuan business since December last year.