Hong Kong Stock Connect Dividend Tax Exemption: A Comparison of Taxes and Fees for Hong Kong Stocks, Mainland China-Hong Kong Stock Connect, Hong Kong Stocks, and US Stocks.

Recently, there have been rumors that domestic regulatory agencies are considering reducing or exempting the dividend tax for mainland investors in Hong Kong stocks. This means that mainland individual investors investing in Hong Kong stocks through the Stock Connect program will no longer have to pay a 20% dividend tax. Currently, mainland investors in Hong Kong stocks face double taxation on dividends, and this news is expected to boost mainland investors' enthusiasm for investing in Hong Kong stocks, especially those with high dividends. Eliminating double taxation is also a positive measure for attracting investment to Hong Kong stocks and improving market liquidity. 1. Double taxation in Stock Connect If investors directly open a securities account in Hong Kong for stock investment, they do not have to pay dividend tax except for H shares, which are subject to a 10% personal income tax. However, if mainland individual investors invest in Hong Kong stocks through the Stock Connect program, they are required to pay a uniform 20% personal income tax on dividends from Hong Kong-listed companies. Investing in Hong Kong stocks through Stock Connect not only incurs a high tax rate, as H shares already have a 10% withholding tax deducted before dividends are paid, resulting in double taxation. For red-chip stocks whose assets and businesses are based in mainland China but are registered overseas, there may also be withholding tax issues when distributing dividends to non-Chinese residents. If a 10% withholding tax is already deducted, and then a 20% dividend tax is imposed, the dividend tax rate will reach 28%. Of course, if red-chip companies have already paid a 10% withholding tax before distributing dividends, mainland Stock Connect investors can apply for a refund of that tax. The table below compares the dividend tax payment and tax rates for opening an account directly in Hong Kong and through the Stock Connect program. 2. Low "taxes" but many "fees" in Hong Kong Known for its low tax rates, Hong Kong imposes no value-added tax or sales tax for Hong Kong companies. The only tax is the profits tax, which can be waived for profits earned outside of Hong Kong. The profits tax rate is 8.25% for profits up to HKD 2 million and 16.5% for profits above that. Personal income tax rates in Hong Kong are also very low, with the highest rate not exceeding 15%. Capital gains tax is not levied in both Hong Kong and mainland China. However, trading in Hong Kong stocks involves various other fees and charges. The fees involved in trading Hong Kong stocks are as follows: - Stamp duty: 0.1% based on the transaction amount - Trading commission: agreed upon with the broker - Trading levy: 0.027 for both buying and selling - Trading fee: 0.05% based on the transaction amount - Trading system usage fee: HKD 0.5 per transaction - Settlement fee: 0.02 of the transaction amount per side In November 2023, the Hong Kong government reduced the stamp duty rate for stock trading to 0.1%, which is higher than the 0.5 stamp duty for A-share securities trading. The fees listed above are relatively small and can be negligible. In addition to dividend tax and capital gains tax advantages, investing in Hong Kong stocks directly involves other "fees" that add up. When investing in new Hong Kong stocks, brokers typically charge 1%-2% as issuance fee, and 0.1%-0.3% for custody fees based on the client's stock market value. Chinese securities firms catering to mainland investors usually waive custody fees, but local Hong Kong firms generally retain this fee, with some using fixed fees like HKD 20-50 per month. 3. Tax incentives for investing in US stocks are significant The United States imposes capital gains tax on capital market investments, but non-US investors are exempt from capital gains tax when investing in US stocks. Foreign investors only need to declare their foreign status by filling out form W8Ben when opening an account. However, all investors, including US residents, must pay personal income tax on dividends from US stocks. The tax rate for dividends for foreign investors is generally 30%. Due to a bilateral tax treaty between China and the US, mainland residents have a 10% tax rate on US stock dividends (other Chinese regions have a 30% rate). US residents must combine capital gains and dividend taxes with other income, paying based on their total income level. Long-term capital gains have a tax rate of up to 20%, while short-term capital gains are merged with regular income for tax purposes. As of 2021, the tax rates for long-term capital gains in the US are as follows: - 0% for single taxpayers with incomes between $0-$40,400 and married taxpayers with incomes between $0-$80,800 - 15% for single taxpayers with incomes between $40,401-$445,850 and married taxpayers with incomes between $80,801-$501,600 - 20% for single taxpayers with incomes above $445,850 and married taxpayers with incomes above $501,601 These tax rates apply to long-term capital gains, with short-term capital gains being subject to different rates.The highest tax rate can reach 37%.Foreign investors investing in US stocks are exempt from capital gains tax, which is a huge advantage. Mainland investors also have the benefit of a two-thirds exemption on dividend tax. However, mainland investors cannot currently invest directly in US stocks. Hong Kong securities firms generally leverage licensed brokers to gain access to US stocks, allowing investors to buy and sell US stocks by opening a securities account with a Hong Kong securities firm. It is important to note that because of the need to pay "toll fees" for using this route, the commission rates for US stocks with Hong Kong securities firms are relatively high. This article is from the WeChat public account "Old Wu Investment Analysis"; Translated by GMTEight.