BEIJING: Chinese watchdog has planned to impose 10 percent capital-gains tax on foreign investors of country.
Several decisions to enforce the tax, which has long been the subject of much uncertainty, are likely to deal a blow to some investors. But for funds that have already made provisions to pay, a move on the tax would provide much-needed clarity, allowing money managers to accurately value their stock holdings.
Officials from the Asset Management Association of China and the State Administration of Taxation told industry executives that the tax would apply mostly to stock investments under the foreign currency-denominated Qualified Foreign Institutional Investors program and a similar, yuan-denominated scheme for the period between Nov. 17, 2009, and Nov. 16, 2014, according to people briefed on the discussions.
The program, known as QFII, grants foreign portfolio managers quotas to invest in mainland shares.
The discussions, which took place at a seminar in Beijing, come as officials place increasing emphasis on a stock-trading link between Shanghai and Hong Kong, which was launched in November. The scheme, which essentially supersedes the 13-year-old QFII program, gives money managers investing in mainland China a break on income and business taxes. Domestic investors in China aren’t subject to capital-gains taxes.
Profits made before Nov. 17, 2009, in the QFII program won’t be subject to the capital-gains tax, according to the authorities. Investors affected by the proposed rule need to file relevant documents by July 31, while the tax authorities will review the records from Mar. 1 to Sept. 30, said one of the people.
“The proposal will finally bring clarity to a key uncertainty long hanging over the industry, which is a positive development,” said Shen Meng, executive director of Chanson Capital, a boutique investment bank. “The broader significance of this move is that, as a special scheme launched in the era of stricter capital controls, QFIIs are looking increasingly outdated.”
Since the rollout of the $30 billion QFII scheme in 2002, Beijing had been vague about whether it will impose a capital-gains tax on foreign investors under the program. The uncertainty has prompted many investors to make special tax provisions, typically based on an assumed tax rate of 10%, over the years.
However, market observers say some funds may already have returned that money to investors. It is unclear how fund managers would get that money back to pay the Chinese government.
