October 10, 2014 / 11:04 AM / 3 years ago

Regulators tell firms no capital gains tax on Hong Kong-Shanghai stock scheme: sources

HONG KONG (Reuters) - Some key regulators involved in setting up a landmark stock trading link between Hong Kong and China have told market participants they expect the scheme to be free of any capital gains tax, people with knowledge of the discussions said.

However, it is not yet clear if a final decision has been made, these sources said.

The trading link, hailed as a milestone to open up China to global investors, is expected to start on Oct. 27, Reuters has reported.

Hong Kong does not impose capital gains tax. However, China applies a 10 percent capital gains tax on foreign institutional investors who trade Chinese shares.

“We have had a lot of verbal reassurances that there won’t be a tax, but nothing official,” said a senior executive who attended a meeting with senior officials of the China Securities Regulatory Commission (CSRC), the main Chinese regulator of the scheme. “The uncertainty is causing concern.”

CSRC officials said privately at an investor meeting in Beijing two weeks ago and at a similar gathering in Shenzhen last month that China would not levy the tax on profits made from trading Chinese stocks through the scheme, individuals with knowledge of the meetings said.

The Hong Kong Securities and Futures Commission said in a separate meeting that the scheme would not be subject to China’s capital gains tax, another person said.

The final decision does not rest solely with the CSRC because several other state agencies are involved, the sources said. The process for coming to a final decision is not clear.

The CSRC is worried that a capital gains tax would reduce potential trading volumes in the scheme. It is at odds with the State Administration of Foreign Exchange, which favors a tax, one source said.

The State Administration of Taxation is also involved in the talks, another source said. Its position is not clear.

Officials at the Chinese government agencies did not respond to requests for comment. The Hong Kong regulator declined to comment. The sources declined to be identified because the matter is confidential.

TRICKY

Unveiled in April, the Shanghai-Hong Kong stock connect scheme allows international investors to trade Shanghai-listed shares via the Hong Kong stock exchange.

It will also allow mainland investors to trade Hong Kong listed shares via the Shanghai Stock Exchange, subject to quotas both ways.

Although China’s 10 percent capital gains tax is relatively low compared with other major financial centers, the complexity of the stock connect scheme will make collecting any tax tricky.

The current rules of the scheme imply any tax would have to be collected by foreign brokers, the sources said. They say calculating a client’s tax liability though will be practically impossible because institutional investors typically channel their investments through many brokers.

Any decision on the tax status of stock connect will have far-reaching implications for China’s Qualified Foreign Institutional Investor and Renminbi Qualified Foreign Institutional Investor schemes, the only avenues currently available for foreigners to invest in China, the tax status of which has been in limbo for years.

In theory, QFII and RQFII are subject to the 10 percent capital gains tax but the Chinese government has never collected the money.

(story refiles to change Tax to Taxation in title in paragraph 10)

Reporting By Michelle Price and Saikat Chatterjee; additional reporting by Shanghai Newsroom; Editing by Denny Thomas and Miral Fahmy

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