Hong Kong - Shanghai stock exchanges "through-train" launched
In September 2014 the Four Party Agreement established the Shanghai-Hong Kong Stock Connect which opened for business on 17 November 2014.
Stock Connect provides mutual market access between two of the largest Asian and global stock markets and opens the Chinese market to international investors.
Through the system investors in the Chinese mainland are able to deal in shares listed in Hong Kong and investors in the Hong Kong Exchange, whether Hong Kong or overseas, are able to trade Shanghai listed shares, providing they have a Hong Kong brokerage account. International investors can now buy designated ‘A shares’, which does away with the requirement to apply for an individual quota. There are limits, with international investors limited to purchases of Rmb300bn of Shanghai listed shares and Chinese investors limited to Rmb25I0bn of investments in Hong Kong. It is anticipated that the development will also lead to the internalisation of the Renminbi.
Stock Connect reinforces Hong Kong’s position as one of the major global financial centres and re-establishes Hong Kong as the bridge connecting the Chinese economy with the rest of the world. It is widely expected that Stock Connect will add further impetus to the continuing development of Hong Kong’s existing capital market.
The Chinese tax authorities and the Ministry of Finance have published two Circulars (2014) N°. 79 and N°.81.
The two Circulars provide for a temporary tax exemption for capital gains made on or after the opening of Stock Connect and applies to international investors who trade Shanghai ‘A shares’ and Mainland investors trading Hong Kong listed shares. The Circulars do not, however, address the procedure for qualifying investors who would wish to claim the benefit of applicable tax treaties.
The temporary exemption for foreign investors, applies to Chinese enterprise income tax, individual income tax and business tax for trades on or after 17th November on Shanghai shares. A 10% withholding tax will be applied on the payment of dividends and bonus share issues, though qualifying investors may apply for a refund of the tax withheld.
Mainland investors will be subject to a 20% tax, on dividends and bonus share issues. Gains on trades of Hong Kong shares are also subject to a temporary exemption from individual income tax and business tax for three years until November 2017.
Stamp duty remains payable in Hong Kong and Shanghai and is unaffected by the provisions of the Circulars.
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