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China: Three-year tax exemption, bond interest for foreign institutional investors

China: Three-year tax exemption, bond interest

China’s Ministry of Finance and State Administration of Taxation jointly issued Circular [2018] 108 (7 November 2018) that provides tax exemptions for foreign institutional investors with respect to China-sourced bond interest.

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The circular gives effect to an August 2018 announcement from the State Council concerning a three-year exemption from corporate income tax (withholding tax) and value added tax (VAT) for China-sourced bond interest derived by overseas institutional investors. The withholding tax and VAT exemptions are effective from 7 November 2018 to 6 November 2021. 

KPMG observation

Circular 108 is viewed as playing a key role in enhancing the attractiveness of China’s bond market to foreign capital. China is unusual when compared to other countries, in applying VAT to bond interest payments. The lack of a VAT input credit was a “real cost.” 

Concerning the withholding tax, various jurisdictions (the United States, Japan, and Australia among others) exempt certain corporate bond interest from withholding tax. Thus, Circular 108 levels the “playing field” for China.

 

Read a November 2018 report prepared by the KPMG member firm in China

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