Investing in China's equity market : PRC tax implications for foreign investors

Compared with the sophisticated and mature equity markets in most developed countries, China’s stock market is still at its infancy. Under the centralised planning system, the stock market was historically accessible to domestic investors only. This restriction was removed in 2002, when China launched the Qualified Foreign Institutional Investors (QFII) scheme, which signified the opening up of its stock market to the outside world. Since that time, a number of additional schemes have been initiated, aiming to elevate the status of China’s capital market to align with its increasingly eminent status in the world economy, and to expedite the internationalization of China’s currency. The aim of this article is to examine the various implications of PRC tax policies with respect to the participation of foreign investors in the QFII, RQFII, SHSC and MRF schemes. Such tax implications include income taxes (enterprise income tax for foreign institutional investors and individual income tax (IIT) for foreign individual investors), business taxes (BTs) and stamp duties. For income taxes, depending on the nature of the income, there can be capital gains and withholding taxes. For indirect taxes such as the BT, there can be other concerns, especially because China is currently in the midst of a final push for the reform of indirect taxes. This article should provide some useful information for foreign investors who are either already participating in China’s capital market or are eager to get their feet wet in the near future.