Chinese authorities have announced a two-year extension of tax incentives for the pilot program allowing innovative firms to issue Chinese Depositary Receipts (CDRs), pushing the current framework through December 31, 2027.

Under a joint notice released on January 21 by the Ministry of Finance, the State Taxation Administration, and the China Securities Regulatory Commission (CSRC), individual investors will continue to enjoy a temporary exemption from personal income tax on capital gains arising from transfers of eligible innovative firms’ CDRs between 2026 and 2027.

Dividend income derived from holding such CDRs will remain subject to China’s differentiated dividend taxation regime, aligned with existing rules applied to listed equities. Where dividend income has already been taxed overseas, investors may claim tax credits in accordance with China’s personal income tax law and applicable bilateral tax treaties or arrangements.

The extension also maintains existing corporate income tax and value-added tax (VAT) treatments for different categories of investors, including public funds and qualified foreign institutional investors.

The policy is not a new initiative, but an extension of preferential tax arrangements first introduced in 2023, signaling regulatory continuity rather than expansion. It applies to CDRs issued by eligible innovative firms listed overseas, including in Hong Kong, whose underlying shares are deposited with offshore custodians and represented domestically by RMB-denominated receipts traded on China’s A-share market.

From a tax perspective:

• Corporate investors are taxed in line with standard equity transfer and dividend rules.

• Public mutual funds remain temporarily exempt from corporate income tax on both capital gains and dividends related to CDRs.

• QFII and RQFII investors are taxed by reference to the treatment applicable to the underlying overseas shares.

• VAT exemptions continue to apply to individual investors and selected institutional transactions during the pilot period.

CDRs were designed to enable domestic investors to gain exposure to offshore-listed technology and innovation-focused firms without cross-border trading. A notable early example was Ninebot, which listed on Shanghai's STAR Market in 2020, becoming one of the first companies to adopt a VIE + CDR structure.

Overall, the extension reinforces regulatory predictability for the CDR framework, particularly for investors assessing medium-term participation in China’s onshore capital markets and for technology firms considering cross-border listing structures.