China is considering a proposal to exempt retail investors from paying dividend taxes on Hong Kong stocks purchased through Stock Connect, according to people familiar with the matter.
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(Bloomberg) — China is considering a proposal to exempt retail investors from paying dividend taxes on Hong Kong stocks purchased through Stock Connect, according to people familiar with the matter.
Regulators including the China Securities Regulatory Commission and the State Taxation Administration are reviewing a plan put forward by Hong Kong to waive the 20% tax on dividends from Hong Kong stocks purchased through the Shanghai and Shenzhen route, the people said, pleading about not doing this called discussing private information.
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The proposal aims to avoid double taxation and create fairer regulations for investors in both Hong Kong and China, the people added. There is no dividend tax in Hong Kong.
A final decision is pending and there is no specific timeline for implementation, the people said.
The proposal comes as Hong Kong seeks to revive its market after a prolonged decline in IPOs and trading volumes. Still, activity has increased recently after the CSRC issued a series of supportive measures last month, including expanding the scope of Stock Connect.
A spokesman for the Hong Kong Stock Exchange and the city’s Securities and Exchange Commission declined to comment. The CSRC was not immediately available for comment.
The Hang Seng China Enterprises Index rose 1.6% in Hong Kong on Thursday, marking a two-day decline.
SFC chief executive Julia Leung said this week that Hong Kong plans to implement the changes this year.
The move would be “positive” for the Hong Kong market and should help keep southbound flows high and support high-yield sectors such as energy and utilities, which are largely state-owned, according to Bloomberg Intelligence Strategist Marvin Chen. “Southbound flows already account for about 15% of Hong Kong’s sales and could increase once this is implemented.”
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Chinese names with the highest dividend yields included China Construction Bank Corp, China Petroleum & Chemical Corp, according to Bloomberg data. and Industrial & Commercial Bank of China Ltd. The developers Hang Lung Properties Ltd., Henderson Land Development Co Ltd. and Link REIT were among the Hong Kong companies that generated the most returns.
While the tax break could benefit some Hong Kong stocks with high dividends, Xin-Yao Ng, investment director at Abrdn, warned that they have not attracted much attention from investors in mainland China in the past.
According to the HKEX quarterly report, an average of HK$31 billion per day was traded on the southern link in the first quarter, down 17% year-on-year. HKEX’s first quarter profit plunged 13% year-on-year, and its share price is still down 53% compared to the start of 2021.
Hong Kong SFC Chairman Tim Lui first proposed cutting dividend tax in March as a delegate to China’s National People’s Congress. He also called on regulators to lower the investor threshold for the trading link to allow more participants.
– With support from Zhang Dingmin, Abhishek Vishnoi and John Cheng.
(Updates with market performance and analyst commentary)
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