A recent announcement by the State Administration of Taxation and the Ministry of Finance said that fund managers of open-ended funds are to be exempted from paying income tax on their gains in securities investment earned before the end of 2003.

Investors are also to be exempted from income tax on open-ended fund dividends.

This is the first time the government formally announced tax benefits on open-ended funds as a means of boosting the industry.

Open-ended funds have been experiencing a rapid market expansion over the past few months.

In the past, the government's position had not been made clear. Although investors were not charged taxes in these areas, there was fear that such taxes would be imposed.

"The announcement clarified the government's stance on open-ended fund taxation and that is a great relief to investors and fund managers alike," said Zeng Zhaoyi, an official with the marketing department of the China Asset Management Co, which issued an open-ended fund last year and will start selling another on Monday, which focuses on bond investment.

Open-ended funds, which are sold directly to investors through outlets of agent banks and securities firms, emerged in China only a year ago and still account for only a small number of China's 60 securities investment funds.

But the sector has been expanding rapidly recently, with 10 open-ended funds already in the market and more in the pipeline.

However, not all funds have sold well or reported good investment results, especially when the stock market has been sluggish.

"It will take some time for Chinese investors to completely accept the new product," said Zhang Weihuan, vice-manager of the asset management department of Guotai Jun'an Securities Co.

But the market has its potential because of the huge bank deposits held by individuals, he said.

To divert such deposits to investment in the open-ended funds, fund managers will have to do a good job to heighten investor confidence, he said.

The tax incentives will help attract more investors to the sector, which has already become a major investment channel in western countries.

The new tax rule said individual investors would also be exempted from income tax on gains acquired from the redemption of open-ended funds. But financial institutions will have to pay such taxes.

Regarding stamp tax, fund managers will be charged a 0.2 percent stamp tax when using the funds for stock investment, but investors will be exempted from a stamp tax in purchase and redemption actions.

(China Daily September 14, 2002)