China Cancels Deposit Interest Tax

by Mary Swire, Tax-News.com, Hong Kong

09 October 2008

China's State Council has announced this week that it is temporarily scrapping the 5% withholding tax on interest on individuals' savings, with the new measure taking immediate effect from October 9, 2008.

The new legislation - which will only be implemented on a temporary basis - has been brought in as part of a package of measures aimed at stabilizing the economy and encouraging growth amid the current slowdown in the market. The new rate is effective as of October 9.

Withholding tax on interest payments was introduced by the Chinese government in 1999 at a rate of 20%. Last year, it was cut to 5% for interest on personal savings in an attempt by the government to cool the raging bull market in shares and encourage people to save rather than invest in the stock market.

In addition to this, the country's Central Bank has also announced that it will be making cuts in both its interest rate and reserve-requirement ratio, which will complement the State Council's tax cut.

Making their announcement on the same day, the Central Bank has proclaimed that an immediate 0.27% drop in deposit and lending rates will be introduced, with an additional 0.5% cut to the reserve-requirement ratio.

The move is also a timely response to the rate cuts by other central banks and part of a coordinated effort to stem the global liquidity crisis.

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