China's Ministry of Finance announced the launch of a pilot program providing new tax incentives to support China innovative-driven strategy, which includes incentives for investments in Chinese Depository Receipts (CDRs) issued by innovative Chinese enterprises. CDRs are similar to American Depositary Receipts (ADRs), which are negotiable securities that represent shares of a foreign company.
In June 2018, China published rules allowing foreign-listed Chinese companies to issue CDRs in China, modeled on the popular ADRs used in the United States. Therefore, to attract companies to issue CDRs, the government introduced the tax breaks for trading of depositary receipts.
The pilot provides three-year tax incentives, including: 1) an individual tax exemption for income from transfers of CDRs.; 2) tax credits for individuals who paid taxes abroad on dividends distributed by entities listed under CDRs. foreign tax credits will be allowed in accordance with any relevant bilateral tax treaties; 3) corporate tax exemptions for income from transfers and dividends, which cover qualified foreign institutional investors, enterprise investors, and publicly-offered securities investment funds; 4) a temporary VAT exemption for gains realized from the sale of CDRs by individuals, mutual funds, and qualified foreign institutional investors.
For individuals, a 36-month temporary exemption is specified. The period of 3 years starts from the date on which the first innovative enterprise CDR was approved by the securities regulatory authorities under the State Council. However, no such period is specified for institutional investors. As the pilot progresses, additional clarification will likely be issued.
For a period of 3 years from the start of the pilot, stamp duty will be imposed at a rate of 1% based on the actual transaction amount of the transfer of the CDRs of innovative enterprises on the Shanghai Stock Exchange and Shenzhen Stock Exchange.
The pilot program will commence from the date on which the first innovative enterprise CDR has obtained regulatory approval.
Source: Chinese Government
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