H-share companies and
individual income tax
Abolition of individual income tax exemption puts H-share companies
in the spotlight. Jeremy Ngai, Danny Yiu and Raymond Chan explain
n 9 June 2011, a Chinese company on 4 January 2011 has invalidated the entire announcement. The main points of the
with H-shares listed on the Hong Circular 45, including the individual income tax circular are:
Kong stock exchange made a public exemption on dividends. T
• he SAT acknowledges that individual
announcement that it would temporarily with- In fact, the collection of withholding income shareholders who are Hong Kong residents
hold 20 percent of individual income tax upon tax on dividends began in 2008 after the new and who receive dividends from non-
distributing the final dividends to its individual Corporate Income Tax Law came into effect. foreign-invested enterprises listed in Hong
shareholders for the year ended 31 December A 10 percent withholding income tax was Kong shall generally be subject to a treaty
2010. If any shareholders were eligible for tax imposed on the payment of dividends arising rate of 10 percent under the China-Hong
treatment provided in double tax arrange- from post-2007 after-tax profits to foreign Kong taxation agreement.
ments upon approval by the relevant Chinese corporate shareholders, including those owned T
• hose individual shareholders who are tax
tax bureau, the company would refund the by non-resident individual shareholders but residents of a country that has a 10 percent
excess withheld tax to them. The announce- registered under the name of corporate nomi- dividend treaty tax rate in its double taxa-
ment attracted the attention of the markets nees or brokers. tion agreement with China do not need to
and put the abolition of the individual income To avoid income tax on dividends, some make specific applications for entitlement
tax exemption under Circular 45 (Guoshuifa non-resident individual shareholders held to the 10 percent treaty rate as would
 No. 45) in the spotlight. their shares directly in their own name to otherwise be required under Circular 124
qualify for the individual income tax exemption (Guoshuifa  No. 124).
From exemption to collection under Circular 45, instead of registering under F
• or individual shareholders who are tax
According to China’s domestic individual the name of corporate nominees or brokers. residents of other countries which have
income tax law, dividend income and capital However, with the abolition of individual entered into a double taxation agreement
gains derived by non-resident individuals from income tax exemption under Circular 45, the with China with an applicable treaty rate of
overseas listed shares of Chinese tax-resident domestic standard individual income tax rate higher or lower than 10 percent, the treaty
enterprises are considered income sourced is 20 percent. rate in the relevant double taxation agree-
from China and within the scope of individual ment should be followed.
income tax. However, non-resident individuals Clarifications by relevant
previously enjoyed specific exemptions under authorities The detailed procedures are set out in the
the following tax circulars: With the abolition of Circular 45, non-resi- table on the opposite page.
• ircular 45 exempted income tax (indi- dent individual shareholders who are Hong Circular 363 (Guoshuihan  No. 363)
vidual income tax and the former foreign Kong tax residents and who receive divi- updates the list of double taxation agreement
enterprise income tax for corporate dends from mainland non-foreign-invested countries with a treaty rate other than 10 percent
shareholders) on dividends and capital enterprises listed in Hong Kong are generally as originally specified under Circular 348.
gains derived by non-resident individual subject to a treaty rate of 10 percent (instead Before Circular 348 was issued, the Hong
investors from B-shares and overseas of the domestic standard individual income Kong Inland Revenue Department issued
listed shares, such as H- and N- shares of tax rate of 20 percent) under the Arrange- a press release dated 4 July 2011 which
Chinese tax-resident enterprises. ment between the Mainland of China and the mentioned a reply from the SAT to the
• ircular 20 (Caishuizi  No. 20) ex- Hong Kong Special Administrative Region for department. The reply was also attached
empted individual income tax on dividends the Avoidance of Double Taxation and the in a letter recently issued by the Stock
derived by non-resident individual investors Prevention of Fiscal Evasion with respect to Exchange of Hong Kong Limited to mainland
from a foreign-invested enterprise, which Taxes on Income. The company’s decision to companies listed in Hong Kong. The content
generally refers to a Chinese company with withhold 20 percent individual income tax of the reply is in line with Circular 348.
at least 25 percent equity ownership by and refund the excess caught public attention
foreign investors. It should be noted that because non-resident individual sharehold- How simplified is the
some of the listed Chinese tax-resident ers may have to go through complicated procedure under Circular 348?
enterprises are foreign-invested enterprises. application procedures to obtain the reduced The clarification under Circular 348 should
rate under the treaty benefit. reduce the administrative burden of both
But the issuance of Public Notice  The SAT issued Circular 348 (Guoshuihan non-resident individual shareholders and
No. 2 by the State Administration of Taxation  No. 348) subsequent to the company’s the Chinese tax authorities in terms of the
44 August 2011
application procedures required in
Circular 124. However, it appears that
the burden of ascertaining whether the dividend paid to their non-
non-resident individual shareholders are resident individual shareholders in
eligible for the treaty rate falls on the payers accordance with Circular 348.
of dividends as withholding agents (i.e. Nevertheless, what constitutes foreign
the mainland companies distributing the equity ownership for the purpose of assessing to individual income tax
dividends). the foreign-invested enterprise status of the on capital gains arising from
A few H-share companies have announced company remains unclear, such as whether it the disposal of as H-, N-, S- and B-shares.
that they will strictly follow the guidance under includes only founder shares (i.e. the shares Unlike the individual income tax withholding
Circular 348 and withhold individual income owned by the shareholders prior to the IPO) on dividends where the withholding amount is
tax at 10 percent for those eligible for the 10 according to Circular 87 (Guoshuifa  determinable and can easily be administered
percent treaty rate, and at the applicable No. 87). The status of shares subscribed and by the overseas listed companies, there has
rate for those not eligible. But it remains to owned by foreign investors after the IPO is been no individual income tax collection on
be seen how the H-share companies, as the also in doubt. Further clarification from the capital gains so far.
withholding agents, will be able to identify the SAT will be required on how to assess the Non-resident individual shareholders may
tax residence of their non-resident individual foreign-invested enterprise status for H-share also be entitled to protection from capital gains
shareholders and withhold the individual companies. tax according to the relevant double taxation
income tax at the appropriate rates. It is not yet known whether the individual agreements. If the Chinese tax authorities do
income tax exemption for foreign-invested indeed start to enforce individual income tax
Lack of clarity over listed enterprises under Circular 20 will prevail collection despite the difficulties, the practical
foreign-invested enterprises in the long run as non-resident corporate approach towards a tax treaty claim under Cir-
It is worth noting that both the reply from the shareholders have been subject to cular 348 might still be a good reference point.
SAT to the Inland Revenue Department and withholding income tax for dividends paid
Circular 348 only deal with dividends paid by foreign-invested enterprises since 2008. Conclusion
by listed non-foreign-invested enterprises. The issuance of Circular 348 demonstrates the
This may imply that non-resident individual Tax treatment on gains on SAT’s practical approach towards the granting
shareholders are still exempt from individual trading of H-shares of treaty benefits. Assuming that non-resident
income tax if the dividend paying company All the above tax circulars are silent on the individual shareholders of H-share companies
is an foreign-invested enterprise pursuant tax treatments on gains derived by non- are predominately Hong Kong tax residents, tax
to Article 2(8) of Circular 20. Some H-share PRC residents on the trading of H-shares. treaty benefit claims available under Circular
companies have announced themselves to However, another implication of the abolition 124 would not bring about additional individual
be foreign-invested enterprises and thus will of Circular 45 is that non-resident individual income tax collection for China’s tax authorities
not withhold any individual income tax on the shareholders are now technically exposed when compared to upfront individual income
tax withholding at 10 percent. It only results
Applicable withholding tax rate Withholding tax procedures in an administrative burden for both Hong
If the treaty rate under the double taxation The withholding agent can apply for treaty Kong resident individual shareholders and
agreement is lower than 10 percent. benefit on behalf of the individual shareholder the Chinese authorities. Capital gains tax on
and, upon approval by the tax authorities, the trading of A-, B- and overseas listed shares
the overpaid tax will be refunded via the
by non-PRC residents should be the next
controversial topic addressed by the SAT.
If the treaty rate under the double taxation The withholding agent shall withhold and
agreement is higher than 10 percent, but settle the tax at the rate that is stipulated
lower than 20 percent. in the double taxation agreement and no
application for treaty benefit is needed.
If the shareholder’s home country does not The withholding agent shall withhold and Jeremy Ngai is a PwC China tax and business advisory
have a double taxation agreement with China, settle the individual income tax at the rate of partner, Danny Yiu is a PwC tax services partner and
Raymond Chan is the firm’s senior manager, China tax and
the applicable treaty rate is 20 percent. 20 percent.
August 2011 45