CHINA will temporarily exempt taxes on profits made from a landmark program linking the Shanghai and Hong Kong stock exchanges, the Ministry of Finance said Friday, removing a potential stumbling block for global investors eager to directly buy Chinese mainland stocks for the first time.

    Market players cheered the announcement, though Chinese regulators left themselves wiggle room to apply a tax to foreign investors at a later date.

    The Shanghai-Hong Kong stock connect, to be launched today, will let international investors trade Shanghai-listed shares via the Hong Kong stock exchange, and mainland investors to trade Hong Kong shares via the Shanghai Stock Exchange.

    While the program will be constrained by quotas initially, analysts say it has the potential to create the world’s third-largest stock market if the two boards are fully integrated.

    But there have been major concerns over implementation and tax policy for the program.

    Clarity on tax policy had been anxiously awaited, especially as the program is set to launch today.

    Individuals and companies in Hong Kong buying shares in Shanghai will be temporarily exempted from paying income tax on gains for an unspecified period.

    China’s exemption of capital gains taxes “removes a huge concern for investors and brokers,” said Nick Ronalds, head of equities for the Asia Securities Industry & Financial Markets Association in Hong Kong.

    “Launching the program with tax uncertainty looming would have been a major obstacle for investors and removes a big source of risk and uncertainty,” he said.

    The Ministry of Finance’s statement said that mainland individuals buying shares in Hong Kong through the program would be exempt from income tax for three years, but will be liable for tax on dividends.

    The statement also said that business tax on Qualified Foreign Institutional Investor (QFII) and Renminbi Qualified Foreign Institutional Investor (RQFII) programs — the two main avenues currently available for foreigners to invest in Chinese stocks — will also be temporarily exempted.

    Mainland firms will be taxed on profits and dividends earned through the program, based on China’s Enterprise Income Tax law, according to the statement that the Ministry of Finance issued. (SD-Agencies)