QFII investors bogged down by burdensome tax filings
International investors are finding the compliance around qualified foreign institutional investor (QFII) licences burdensome as they prepare to file their tax returns before the July deadline.
The QFII program, and its renminbi equivalent (RQFII), allows institutional investors – like non-resident Chinese fund managers – to invest in Chinese A-shares.
The initiative means investors outside of China are exempt from capital gains tax, but are subject to paying a 10% withholding income tax – a tax on securities owned by a non-resident – on the profits earned on equity investments.
In late February, the Beijing State Tax Bureau advised fund managers that they must collect the tax certificates for all equity investments made between 17 November 2009 and 16 November 2014, ending the day before the Hong Kong-Shanghai Stock Connect initiative was launched.
Those QFII and RQFII licence-holders under the tax administration of authorities in Beijing must also provide information about their withholding income tax status on dividends and interest received in this five-year period. This is to demonstrate the tax has been properly withheld and paid to the relevant tax authorities by the issuers of each tax certificate.
But the huge volume of investments made in this time poses a problem for investors, leading to a lot of extra filing work for their accountants. Investors also risk being fined if they do not complete their tax returns before the deadline.
“Difficult”
“There are QFIIs and RQFIIs which may have invested in highly diversified A-Share portfolios, so they would need to liaise with a large number of issuers in order to obtain the tax payment slips on dividends and interest,” said Loretta So, partner at Ernst & Young in China.
“This could be difficult, especially in the time frame given,” she said. “Generally investors don’t keep a copy of the tax payment slips on dividends and interest because this tax would be withheld and paid to the relevant tax authorities by the issuers.
“It is anticipated that the workload could be burdensome.”
