The Long Wait Is Over - Clarity on the Taxation of Capital Gains by QFIIs/RQFIIs in China

China's qualified foreign institutional investor ("QFII") program has granted foreign investors access to China's capital markets since 2002.  In 2011, the Renminbi QFII program ("RQFII") was also introduced to allow licensed RQFIIs to raise Renminbi funds offshore and invest directly into securities markets in China.  To date, more than three hundred international institutions comprising banks, fund management institutions, insurance companies, securities companies and other asset management companies have applied for and received approvals to invest in China as QFIIs or RQFIIs.  Over the years, the Chinese government has shown willingness to expand the QFII/RQFII programs by granting new investment quotas or allowing existing participants to increase their quotas, but for reasons that have never been entirely clear, one area that has always lagged behind has been the taxation of QFIIs/RQFIIs.

However, the State Administration of Taxation, together with Ministry of Finance and the China Securities Regulatory Commission recently took the markets somewhat by surprise on 31 October when they issued a circular on the  taxation of capital gains derived by QFIIs/RQFIIs. 

You can find out what the circular says, why it took so long to be issued and the implications for QFIIs/RQFIIs both on a retrospective and forward-looking basis by reading the full version in the attachment.

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