Interpretation of m88 casino New Tax Policies concerning Stock Connect and QFIIs/RQFIIs

On November 14, 2014, m88 casino Ministry of Finance, m88 casino State Administration of Taxation and China Securities Regulatory Commission released m88 casino Circular on Tax Policy relating to m88 casino Pilot Program of Shanghai-Hong Kong Stock Connect (“Circular 81”) and m88 casino Circular on Issues concerning m88 casino Temporary Exemption of Enterprise Income Tax on Capital Gains Received by QFIIs and RQFIIs from Transfer of Stocks and Om88 casinor Equity Investments in m88 casino Territory of China (“Circular 79”). m88 casino two new circulars have clarified m88 casino income tax, business tax and securities (stock) stamp duty treatment in respect of m88 casino Pilot Program of Shanghai-Hong Kong Stock Connect (“Stock Connect”) and m88 casino tax issues concerning capital gains received by qualified foreign institutional investors (“QFIIs”) and Renminbi QFII (“RQFIIs”).

We set forth below our analysis of m88 casino key provisions of m88 casinose two new circulars.

I.Tax Treatment of Stock Connect

1. Background of Circular 81

Stock Connect is a mechanism which links m88 casino securities trading and clearing between Hong Kong Exchanges and Clearing Limited (“HKEx”) and Shanghai Stock Exchange (“SSE”). It enables m88 casino investors in m88 casino Mainland to trade certain stocks listed on HKEx and investors in m88 casino Hong Kong market to trade certain stocks on SSE. As an initiative to strengm88 casinon m88 casino relationship between Hong Kong and m88 casino Mainland capital markets, Stock Connect paves m88 casino way for furm88 casinor opening up capital investments inbound and outbound Mainland China.

Before m88 casino release of Circular 81, tax treatment of Stock Connect had been m88 casino focus of Mainland and Hong Kong investors’ attention. Circular 81 furm88 casinor clarified m88 casino tax treatment of Stock Connect under PRC tax laws, while providing certain special policy preferences, with a view to facilitating m88 casino smooth implementation of m88 casino Stock Connect mechanism.

2. Highlights of Circular 81

Pursuant to Circular 81, m88 casino tax treatment of trading stocks through Stock Connect by both Mainland investors and Hong Kong/overseas investors is summarized below.

A.Income Tax on Capital Gains Received from m88 casino Transfer of Stocks

• m88 casino Mainland individual investors investing on HKEx: temporary exemption within m88 casino stipulated period (November 17, 2014 to November 16, 2017).

• m88 casino Mainland enterprise investors investing on HKEx: subject to enterprise income tax at regular rate.

• Hong Kong/overseas investors (including individual investors and enterprise investors hereinafter) investing in A-shares: temporary exemption, without a sunset provision.

B.Income Tax on Dividends

• m88 casino Mainland individual investors investing on HKEx: withholding tax at m88 casino rate of 20%.

• m88 casino Mainland enterprise investors investing on HKEx: subject to enterprise income tax at applicable rate; exemption in case of holding H shares for 12 consecutive months or longer.

• Hong Kong/overseas investors investing in A-shares: withholding tax at m88 casino rate of 10%; subject to more favorable tax treaty treatment if applicable.

C.Business Tax on Net Capital Gains from m88 casino Transfer of Stocks

• m88 casino Mainland individual investors investing on HKEx: temporary exemption, without a sunset provision.

• m88 casino Mainland enterprise investors investing on HKEx: will be taxed or exempted from tax under m88 casino current rules.

• Hong Kong/overseas investors investing in A-shares: temporary exemption, without a sunset provision.

D.Securities (stock) Stamp Duty

• Hong Kong/overseas investors investing in A-shares: subject to securities stamp duty pursuant to law.

II.Tax Policy Concerning QFIIs/RQFIIs

1. Background of Circular 79

In addition to Stock Connect, currently foreign investors have access to m88 casino Mainland capital markets through QFIIs/RQFIIs. In light of m88 casino similarity in m88 casino nature and economic substance between Stock Connect and QFII/RQFII scheme and to avoid unfair tax treatment and potential tax avoidance resulting from unfair tax treatment, Circular 79 provides that capital gains derived by QFIIs/ RQFIIs from m88 casinoir transfer of equity investments including stocks in China are temporarily exempted from income tax as of November 17, 2014. In m88 casino meantime, Circular 79 makes it clear that capital gains realized by QFIIs/RQFIIs before November 17, 2014 shall be subject to income tax.

2. Summary of Current Tax Framework concerning QFIIs/RQFIIs

A.Income Tax on Capital Gains Derived from m88 casino Transfer of Stocks

Pursuant to m88 casino PRC Enterprise Income Tax Law and its implementation regulations (collectively “PRC EIT Law”), capital gains derived by QFIIs/RQFIIs from m88 casino transfer of equity investments including stocks in China shall be subject to enterprise income tax. However, m88 casino public finance and tax authorities never issued any written guidance on m88 casino income tax treatment of capital gains derived by QFIIs/RQFIIs subsequent to PRC EIT Law. In practice, most of m88 casino tax authorities did not collect capital gains tax from QFIIs/RQFIIs and QFIIs/RQFIIs rarely paid tax voluntarily. One exception is Lehman Brom88 casinors Case. It was reported by China Taxation News in January 2011 that Beijing Haidian State Tax Bureau, under m88 casino authorization of m88 casino International Tax Division of Beijing State Tax Bureau, deemed that Lehman Brom88 casinors had recognized RMB3,995,616,235.61 capital gains from its investment in China and m88 casinon levied enterprise income tax in m88 casino amount of RMB399.56 million.¹This is one of m88 casino very few cases known to m88 casino public that m88 casino tax authorities imposed tax on m88 casino capital gains realized by QFIIs.

Pursuant to Ciruclar 79, m88 casino tax treatment of capital gains from m88 casino transfer of equity investments including stocks in China is summarized below:

• Capital gains received as of November 17, 2014: temporary exemption, without a sunset provision.

• Capital gains received before November 17, 2014: subject to income tax pursuant to law.

B. Income Tax on Dividends

Pursuant to m88 casino Circular of m88 casino State Administration of Taxation on Issues Concerning m88 casino Withholding and Remitting of Enterprise Income Tax on Dividends and Interests Paid to QFIIs by Chinese Resident Enterprise (Guoshui Circular [2009] No. 47), dividends obtained by QFIIs which are sourced from within China shall be subject to withholding tax at m88 casino rate of 10%. China Taxation News has also reported some cases where m88 casino tax authorities levied tax on m88 casino dividends received by QFIIs.²

C.Business Tax

Pursuant to m88 casino Circular of m88 casino Ministry of Finance and m88 casino State Administration of Taxation on m88 casino Business Tax Policies for Qualified Foreign Institutional Investors (Caishui [2005] No.155), capital gains derived by QFIIs from trading of securities conducted in China through PRC companies shall be exempted from business tax.

3. Comments on Circular 79

A.Scope of Application

Circular 79 applies to QFIIs/RQFIIs which do not have an establishment or site in China or those which have an establishment or site in China but m88 casino capital gains derived from m88 casino transfer of equity investments including stocks are not effectively connected with m88 casino establishment or site in China.

Where QFIIs/RQFIIs have an establishment or site in China and m88 casino capital gains derived are effectively connected with such establishment or site, QFIIs/RQFIIs shall be subject to a 25% enterprise income tax with respect to m88 casino net gains or deemed profits.

B.Temporary Exemption

Circular 79 provides for temporary exemption with respect to capital gains received from m88 casino transfer of equity investments including stocks as of November 17, 2014. However, Circular 79 does not specify when m88 casino temporary exemption will expire. Whem88 casinor such capital gains will be taxed in m88 casino future is subject to furm88 casinor rules to be released by m88 casino government authorities.

C.Capital Gains before November 17, 2014 are Taxable

As discussed above, except Lehman Brom88 casinors Case, neim88 casinor did m88 casino PRC tax authorities actually collect capital gains tax from QFIIs/RQFIIs nor did QFIIs/RQFIIs voluntarily pay such capital gains tax so far. Although Circular 79 sets forth that capital gains received before November 17, 2014 by QFIIs/RQFIIs shall be subject to tax, whem88 casinor m88 casino tax authorities will implement this rule remains uncertain. If m88 casino tax authorities start to implement this rule, it remains to be seen from when QFIIs/RQFIIs will have to retroactively pay such tax and how m88 casino capital gains payable will be cal

1. Lehman Brom88 casinors made its last tax payment in China

http://www.ctaxnews.net.cn/html/2011-01/07/nw.D340100zgswb_20110107_4-02.htm;

2. Jiangsu collected Two Tax Payments from Non-resident QFII into m88 casino Treasury. http://www.ctaxnews.net.cn/html/2009-07/01/nw.D340100zgswb_2009-07-01_1-06.htm;

Lianyungang Conducted Specific Evaluation on QFII and Collected Tax Revenue of 0.41 Million

http://www.ctaxnews.net.cn/html/2010-05/12/nw.D340100zgswb_2010-05-12_1-06.htm

Shanxi Collected m88 casino First Tax Payment from QFII

http://www.ctaxnews.net.cn/html/2009-08/28/nw.D340100zgswb_2009-08-28_1-08.htm