Withholding Tax For Chinese Public Listed Company < edited on 14 Jul 2020>



image credit to money.cnn.com

A-Share , B-Share , H-Share , Red-Chip, S-Chip and P-Chip  ?


Nobody likes to pay tax and try to avoid or minimize it as much as possible, the tax could be a huge cost component” and it reduces our total rate of returns, especially if like we would have to pay 20-30% of withholding tax for capital gain or dividend income for investing in certain countries.

As you know, I have just started to invest in HKG/CHN market since Sep 2019 and still learning on different classes structure and tax issues on investing in China-related companies through HKEX.





Publicly traded companies in China generally fall under three share categories:
  • A-shares represent publicly listed Chinese companies that trade on Chinese stock exchanges such as the Shenzhen and Shanghai Stock Exchanges. These stocks trade in yuan renminbi (CNY).
  • B-shares are Domestically Listed Foreign Investment Shares. They list on the Shenzhen and Shanghai exchanges, and trade in foreign currencies.
  • H-shares, traded on Hong Kong's exchanges, are regulated by Chinese law and are freely tradable by anyone. These shares trade using the Hong Kong dollar (HKD).

·         H-Shares

·         Chinese H-shares represent the shares of publicly-traded incorporated Chinese companies listed on the Hong Kong Stock Exchange. H-shares are issued in China under Chinese law and are subject to the Hong Kong Stock Exchange's listing requirements.

·         The rules state that annual accounts must follow Hong Kong or international accounting standards. Also, a company’s articles of incorporation must include sections clarifying the varying nature of domestic shares and foreign shares, including H-shares, as well as the rights given to each purchaser.
·         
      Unlike A-shares listed on the Shanghai or Shenzhen stock exchanges and trading in Chinese renminbi, H-shares quote, and trade with a face value of Hong Kong dollars. H-shares are also open for all investors to trade.

·         There are usually price discrepancies between a company's A-shares and H-shares. Also, A-shares generally trade at a premium to H-shares.

We used to only be able to buy H-share listed in HKEX but with this so-called “Stock Connect” programme, now we will be able to buy A share from HKEX :

WHAT IS STOCK CONNECT <source: HKEX>

A unique collaboration between the Hong Kong, Shanghai and Shenzhen Stock Exchanges, Stock Connect allows international and Mainland Chinese investors to trade securities in each other's markets through the trading and clearing facilities of their home exchange.

First launched In November 2014, the scheme now covers over 2,000 eligible equities in Shanghai, Shenzhen and Hong Kong.

From below Link, you will be able to find A-share listed on HKEX from SSE ( Shanghai Stock Exchange ) and SZSE (Shenzhen Stock Exchange ).





Red Chip vs S-Chip vs P-Chip


Red Chip

What Is a Red Chip?

A red-chip company does most of its business in China, and the Chinese government has a considerable stake in the firm. However, it is incorporated outside mainland China and listed on the Hong Kong Stock Exchange. Red-chip stocks are expected to maintain the filing and reporting requirements of the Hong Kong exchange. That makes them an important outlet for foreign investors who wish to participate in the rapid growth of the Chinese economy.

KEY TAKEAWAYS

A red-chip company does most of its business in China and the Chinese government has a considerable stake in the firm.

Red chip firms are incorporated outside mainland China and listed on the Hong Kong Stock Exchange.

Red chips take their name from China's red flag and the name reflects the Chinese government's partial ownership of the company.

Red-chip firms are not necessarily large or well-known.

Understanding Red Chips

Although red chips are listed on the Hong Kong Stock Exchange, they should not be confused with H-shares. H-shares are shares of companies that are incorporated in mainland China but traded on the Hong Kong Stock Exchange or another foreign exchange. Red chips, on the other hand, must be incorporated outside mainland China

Example of a Red Chip

China Mobile was the largest red-chip company as of December 2019, with a market capitalization of more than 1.2 trillion Hong Kong dollars (over 150 billion U.S. dollars). The firm was incorporated in Hong Kong in 1997, so it is incorporated outside of mainland China. The firm's shares are listed on the Hong Kong Stock Exchange, which is also required for red-chip stocks. In December 2018, 72.72% of the company was held by China Mobile Communications Group Co., Ltd., which is a Chinese state-owned enterprise.


S Chip

S chips are Chinese companies listed on Singapore Exchange. Their shares are known as S shares. S chips are incorporated in Singapore, the British Virgin Islands, the Cayman Islands and Bermuda[citation needed] and have their business operations in mainland China.
Some S chips were beset by corporate governance and accounting problems, resulting in reputational issues that led to the huge share price declines in 2009. [1]


P Chip

The term P chip refers to Chinese companies (non-state own enterprises ) listed on Hong Kong Stock Exchange which are incorporated in the Cayman IslandsBermuda and the British Virgin Islands with operations in mainland China, and are run by private sector Chinese businessmen. During the financial crisis of 2007–2010, P chips showed a dramatic increase in the rate of bankruptcy failures as compared to H shares or red chips.

The main difference between S chips and P- chips are the exchange on which they are traded.



Withholding Tax

As we know, in some countries, we will need to pay withholding tax for dividend received from companies we invested in a foreign country. It could be as high as 30% (eg dividend received from the US companies )

For China-related stocks, A-share, B-share and H-share are subject to a 10% withholding tax while P-Chip, Red Chip and S-Chip are subject to a 0% withholding tax, unless a specific withholding tax of 10% is announced by the companies.


You may find the link useful :

Dividend Withholding Tax Table ( From ICE Data Index, LLC )



In summary, to avoid any confusion of class of shares like A, B, H or different kind of “Chips”, you may just look out for the “Place of Incorporation “ in their respective Annual Report or Interim Result announcement. For those having “Place of Incorporation “outside PRC like Bermuda / Cayman Island / Singapore / Hong Kong ), there will be no withholding tax for the dividend.
Hope this assist and clarify.

Recently, I have found out that even dividend received from some of my Red-Chip which incorporated in HKG are also subjected 10% Withholding Tax from China Tax authority ( from my experience of dividend received from China Power - 2380 ) on 30th June 2020, also subsequent dividend from CNOOC- 0883 as Red-chip which is also incorporated in HKG.

After a few clarifications with my broker, would confirm that all the income derived from PRC will need to pay withholding tax when it is distributed in dividend, it just that some companies decided to absorb or pay the withholding tax at the company or corporate level. One will need to look out for the "notes" in their respective P&L statement whether the withholding tax been paid by the company.

After checking with their respective P&L statement, would confirm that two of my Red-chip i.e China Merchant Port Holding (0144) and China Lilang (1234), both have indicated in their P&L statement that companies are paying the WHT, hence at investors level, we are not paying the 10% tax.

As such, we can't just purely rely on "place of Incorporation " to determine if any of the Red-Chip would need to pay WHT. We will still need to check their respective P&L statement on tax expenses or asking your stock broker before investing in any Red Chip listed in Hong Kong.

Hope this clarifies and sorry for my early statement which wrongly mentioned that Red-chip which is incorporated in HKG/ Cayman Island /Bermuda are not subjected to 10% WHT.

So far, base on my dividend received :

These are companies :

1) Not subjected to WHT :
- BOC (HKG ) (2388)
- China Merchant Port Holdings ( 0144)
- China Lilang (1234)

2) Subjected to WHT
- BOC (3988)
-China Construction Bank (0939)
-China Minsheng Bank (1988)
- CNOOC (0883)
- China Power (2380)
- Qilu Expressway ( 1576) 
- Qingdao Port Int ( 6198)
- Qingling Motor (1122)
- China PetroChem ( 0386 )

Please take note that all these are still subjected to policy change from respective companies from time to time.
You may need to refer to their latest Financial statement for the info or call your broker to confirm.

// edited 14 Jul 2020 //


This will probably be my last blog post in 2019, taking this opportunity, I would like to wish you and your family a joyful, bright, healthy, prosperous and happiest new year ahead! Happy New Year 2020!


image credit to happynewyear2020.com

Cheers !!


STE




P.S:
Withholding Tax could be quite substantial and affecting your overall dividend yield by more than 1% point if your stock’s dividend yield is high ( eg. 10% -> 9% )
Below just an example of two stocks I have invested, one with Withholding Tax and the other without tax.



Comments

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  4. Hi STE, do you know if China Mobile absorbed this 10% divs? From my recent reading of the annc it doesn't seem to be the case, but wanna check if u have had first hand exp with this particular counter before.

    ReplyDelete
    Replies
    1. Hi kai xiang,
      I sold my China Mobile before getting the dividend , hence not sure if the dividend is subjected to WHT or not. You may need to read the "tax notes" in their financial report whether they have pay the WHT on behalf at company level or not.
      From my reading , it seems that the company is not paying and will withhold the tax on behalf, hence is subjected to WHT.
      Please kindly share your experience if you have received the dividend eventually.
      Thanks.

      Delete
    2. FYI, I just received my China Mobile dividend and there was a 10% WHT.
      Very helpful post btw, STE

      Delete
    3. Hi owq,
      Thanks for the info and confirmation. Is very helpful for other readers to take note on this.
      Cheers !! :D

      Delete

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