‘China looking at tax breaks to attract more global funds’

BEIJING: China is considering tax breaks to attract more global funds to register in the country and reverse swelling outflows to international tax havens, said people with knowledge of the matter.

The Finance Ministry has enlisted a global accounting firm to conduct due diligence ahead of a potential feasibility study on a capital gains tax exemption, the people said.

The deliberations are at a preliminary stage and there are regulatory hurdles that would need to be cleared first.

Attracting international funds is a key part of President Xi Jinping’s push to build a more institutionally driven financial system that’s less prone to the boomand-bust cycles that have plagued China.

International funds registered in China are currently subject to taxes of up to 25 per cent on capital gains earned worldwide, marring the nation’s appeal as a base.

Dropping the levy could also reduce the propensity of local fund managers to use offshore tax havens as a base.

The Cayman Islands and British Virgin Islands remain second and third only to Hong Kong as the most popular destinations for China’s foreign direct investment outflows. Chinese money flows into the British Virgin Islands jumped almost 60 per cent in 2017 even as overall outflows fell, according to the latest available official data.

The other main benefit for international funds of being domiciled locally is having easier access to domestic investors.

“If there’s such a tax break, it would certainly attract funds that invest globally but want to register in China,” said Qi Huaying, a partner at Han Kun Law Offices, here.

Such a move would mirror a similar shift in Hong Kong. The former British colony last year proposed widening tax breaks to include hedge funds and private equity firms that are domiciled in the city. Market watchers said at the time that should encourage more of them to move there, and away from offshore centres such as the Cayman Islands.

Any potential capital gains tax break would only be for funds that invest in foreign currency outside China, the people said.

It wouldn’t apply to other levies the fund management companies pay locally, they said.

It would also only apply to socalled private funds, or those that cater to institutional clients and wealthy individuals, one of the people said.

25pc Taxes on capital gains earned worldwide by international funds registered in China currently