There is a whiff of breakthrough in the air. Foreign investors that have long grappled with crippling ambiguity about China's policy towards capital gains tax are looking at the possibility of clarity on this matter. It is hard to underestimate the issue's importance. Since China launched its qualified foreign institutional investor (QFII) plan in 2002, managers of foreign funds invested in the mainland have been unsure whether they need to pay tax on their capital gains. The tax department has not said there is a tax, and it has not said there is not a tax. It has just left the matter unclarified. On a practical level, however, every time a QFII fund wants to move money out of China, it needs to get a certificate from the tax department saying there are no outstanding tax claims against the money. Foreign investors have dealt with this issue by setting aside 10 per cent of their capital gains in a fund on the mainland, as a provision against a tax. It is an administrative headache and, with US$81.5 billion of foreign money invested on the mainland through QFII and its renminbi-denominated equivalent (RQFII) - and with many multiples of that amount invested through the years in A-share exchange traded funds - the potential tax is substantial. A big hint that change was afoot came in January, when China Asset Management announced that it was ending its withholding tax on an A-share ETF. CSOP, E Fund and Hai Tong Asset Management soon followed, likewise axing the withholding tax on their own ETFs. The asset managers are Hong Kong subsidiaries of mainland institutions. They understand China and are sensitive to its politics. Their decision that they no longer need provision for a withholding tax suggested mainland officials were leaning towards deciding to officially clear offshore investors of that tax. Jack Wang, the head of sales at CSOP Asset Management, said the decision to end the withholding tax on their A-share ETFs was connected to legal advice that a tax treaty Hong Kong shares with the mainland protects investors from capital gains charges. The treaty exempts Hong Kong residents from capital gains tax on the mainland. This is by no means the final word on the matter. Mainland tax officials could tell institutions that the tax treaty does not cover them. "We are not saying we are exempt since there is no clarity so far. We are saying we believe we should be exempt," Wang said. However, all this is happening in the context of a widening internationalisation of the mainland market, which is creating expectation that China will finally clarify its policy. "Through train two" should open mainland securities to direct investment by the Hong Kong public in about six months. Mutual recognition of funds will open Hong Kong funds for sale in the mainland, and mainland funds for sale in Hong Kong. This is putting pressure on mainland officials to make a final ruling on the capital gains tax. Asset managers say they have been called into meetings with China's tax bureau, the State Administration of Foreign Exchange and the China Securities Regulatory Commission to talk about the withholding tax issue. Tracy Ho, tax managing partner, Hong Kong & Macau for EY, said the big international accounting firms were called to Beijing in February to talk about the withholding tax. Most believe this is building to a policy decision that should arrive before the through train is implemented. "A lot of my peers believe through train could be a big push to clear up this issue [since it] is such a high-profile programme. People will be buying stocks, and the natural question will be, am I paying tax?" Wang said. "It's a good chance for the industry to get resolution on this."