China May Exempt Share Dividends From Tax

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

01 September 2008

It was rumoured in the Chinese media on Thursday that the central Chinese government is considering dropping tax on stock dividends in a bid to tempt investors back to China's flagging markets.

Citing officials within the China Securities Regulatory Commission, the Shanghai Securities Journal reported that a possible dividend tax exemption is currently under consideration in Beijing, although it is unclear if the measure would be a temporary market-boosting initiative, or a permanent move.

History suggests however, that if the Chinese government decides to go ahead with the move, it will be transient in nature as it has used such temporary tactics in the past to help bolster the stock market.

In March, corporate taxes due on Chinese mutual funds were temporarily suspended for an "indeterminate period." This means that income from stock and bonds trading by securities investment funds is exempt from enterprise income tax for the foreseeable future.

Gains from mutual fund dividends, as well as fund managers' income from mutual fund trading, were also exempted from income taxes under this measure.

The Chinese government has also used fiscal policy in the reverse situation, such as its tripling of share stamp duty during the raging bull market which peaked in 2007.

The speculation over the dividend tax exemption did not do much to excite the markets, and the Shanghai Composite Index (SSE Index) closed up just eight points, or 0.34%, on Thursday. However, it is the longer term downtrend that policy makers are likely to be more concerned about and since hitting that historic high almost a year ago, the SSE Composite Index has declined in value by about 60%.

Recommended