One of the common questions that we are asked at Hwuason is in relation to the tax treatment of H-Shares – shares in Chinese companies that are listed on the Hong Kong stock exchange.
According to Articles 3 and 6 of the Enterprise Income Tax Law, non-resident enterprises are required tax in relation to the dividends from shares in a resident enterprise. The relevant tax rate on such income is 10%. Despite this, up until November 2008, the general practice was that dividends from H-shares were exempt from tax. In November 2008, the State Administration for Taxation issued Guoshuifa  No. 897 which indicated that tax was payable on such dividends and that the resident Chinese enterprise was a withholding agent for its non-resident shareholders.
It has not been clearly stated whether non-resident enterprise are taxable on capital gains from H-shares. The current practice, based on previous regulations, is that the income from the transfer of H-shares is exempt from tax. However, there is some genuine concern that such a practice will be changed in the near future. Given that dividends are now taxed, I think it would be doubtful that an exemption for capital gains will be continued in the future.
In terms of removing the risk of changes to the tax treatment off capital gains, it may be advisable for investors to take advantage of favourable DTAs that prevent China from taxing holdings below 25%. The merits of such an option would be subject to the particular circumstances, and the powers that China’s tax officials have in accordance with the General Anti-Avoidance Rule always needs to be kept in mind.
Many people are under the misapprehension that China does not impose tax on capital gains or income from property. My theory is that the reason why some people believe that China has no capital gains tax is that there is no separate tax law or regime entitled “capital gains” in China. Rather, the profit realised on the sale of an asset falls within the definition of “income” in the relevant laws. I have come across this problem before so perhaps it is time we detailed the applicable provisions. The applicable tax law in China depends upon the character of the relevant taxpayer; corporate or individual.
Corporate taxpayers are subject to the Enterprise Income Tax Law (“EITL”). Article 6 of the EITL provides that “[a]n enterprise’s monetary and non-monetary incomes from various sources shall be the total amount of incomes, including:
- income from the sale of goods;
- income from the provision of labor services;
- income from the transaction of property;
- dividend, bonus and other equity investment proceeds;
- income from interests;
- income from rentals;
- income from royalties;
- income from accepted donations; and
- other incomes.
So, included in the definition of income for the purpose of the EITL is proceeds from transactions in property (i.e. capital gains). “Property” includes real property, personal property and intangible assets. Robert, have you got this?
Article 2(9) of the Individual Income Tax Law provides that the income of individuals includes income from “the transfer of property”. Although individuals are generally provided with an exemption for the sale of listed shares. Restricted shares (as of December) and shares held by foreign persons in foreign invested enterprises are excluded from this exception.
Hsu could possibly contend that since he is talking about stock performance his point still remains valid. However, his point was more borader than that. He was talking about China’s economic performance rather than the potential returns from individual investments.
The following property related taxes exist in China:
- Stamp Duty – stamp duty is payable upon documents transferring title to property (including land use rights) whether by purchase, sale, inheritance. The stamp duty is 0.05% of the stated value of the transaction.
- Deed Tax – this is a tax imposed on the total value of “land use rights” or “building ownership rights” when transferred.
- Land Value Added Tax – a tax of between 30 to 60% of the sale land and buildings on land.
- Urban and Township Land Use Tax – an annual tax on enterprises and individuals utilising land within cities, townships and mining areas. The tax varies from RMB 0.6 to 1.5 per square meter depending upon the location.
- Urban Real Estate Tax – an annual tax on the owners of real property.