Chinese Government Introduces Tax Benefits to Spur Investment in Tech Firms’ CDRs
In a move aimed at bolstering the resurgence of Chinese technology companies listed abroad, Chinese authorities have announced a series of tax incentives for both individuals and institutions investing in Chinese depositary receipts (CDRs) of innovative firms based overseas. This initiative is part of China’s ongoing efforts to support the reintegration of globally listed Chinese tech companies, amid the rapidly evolving global geo-economic landscape.
The objective of this measure is to steadfastly reinforce China’s strategy of development driven by innovation, while simultaneously advancing the execution of the nation’s pilot program designed to facilitate domestic listing and issuance of CDRs for pioneering companies. This announcement was jointly made by the Ministry of Finance, the State Taxation Administration, and the China Securities Regulatory Commission (CSRC).
These tax advantages will be accessible from September 21, 2023, until December 31, 2025.
For Chinese individuals investing domestically, any profits derived from the sale of CDRs will be exempt from taxation within China. Moreover, any overseas taxes paid on dividends will be accounted for and offset by Chinese authorities.
Chinese corporate investors, similarly, will not be required to pay taxes in China on the gains obtained from trading CDRs, in addition to dividends and bonuses acquired through the holding of CDRs.
This beneficial tax treatment will also be extended to other institutional investors, including public equity funds.
Both individual and institutional investors will also be waived from value-added tax obligations. Concerning stamp duty, when CDRs are transferred to the Shanghai and Shenzhen stock exchanges, the transferor will be subject to a stamp tax at a rate of 1 percent of the actual transaction amount.
Yang Delong, chief economist at First Seafront Fund Management Co in Shenzhen, commented on these developments, stating, “Recent policy measures have been introduced to invigorate the capital market, effectively addressing market concerns and likely instilling greater confidence.” He also anticipates further measures to follow suit in order to stabilize market expectations.
Tuesday’s announcement indicated that this move is a continued effort to implement the pilot program designed to bolster the domestic issuance of CDRs for innovative firms. Initiated in 2018, this program aims to facilitate the domestic debut of prominent overseas-listed Chinese tech giants.
The pilot program encompasses companies in high-tech or strategically emerging sectors, including but not limited to the digital economy, big data, cloud computing, artificial intelligence, software and integrated circuits, high-end equipment manufacturing, and biomedicine. This expansion of the program was originally outlined by the CSRC during its initiation.
This development comes against the backdrop of a series of restrictive measures by the United States targeting Chinese tech companies and US-listed Chinese firms, forming part of the US’s broader agenda of decoupling and containment.
These tax incentives on Tuesday also parallel China’s proactive efforts to reinvigorate the stock market. The CSRC’s recent announcement included a spectrum of policies aimed at stimulating the stock market, encompassing fee reductions for transactions, robust cultivation of equity funds, and contemplation of a streamlined process for tech firms striving to achieve breakthroughs in core technologies.
On Tuesday, mainland Chinese stocks registered marginal gains, with the Shanghai Composite Index recording a 0.88 percent increase, and the Shenzhen Component Index marking a 0.53 percent rise. Concurrently, in Hong Kong, the Hang Seng Index saw an uptick of 0.95 percent, while the Hang Seng Tech Index surged by 1.98 percent.
