The new Agreement Between The Government Of The Italian Republic And The Government Of The People’s Republic Of China For The Elimination Of Double Taxation With Respect To Taxes On Income And The Prevention Of Tax Evasion And Avoidance represents an important step in economic relations between the two countries, aiming to simplify tax transactions for companies and improve conditions for bilateral investment. 

Signed in 2019 and recently approved early November by the Italian Chamber of Deputies following earlier approvals by the Council of Ministers and the Senate, the new Agreement shall enter into force 30 days after the ratification instruments are exchanged and shall have effect as respects income derived during the taxable years beginning from January 1st of the year following its entry into force. 

It aims to avoid double taxation on income generated in one State by individuals or companies’ residents in the other, encouraging more beneficial economic flows for both nations.

The Agreement, in line with the binding recommendations of the OECD/G20 BEPS project and incorporating some standard clauses of the 2017 OECD model, is of strategic importance to Italian companies and individuals operating in China and vice versa, as China is Italy’s second largest importing country.

The key changes compared with the 1986 agreement currently effective include:

• Dividend: the withholding tax (“WHT”) rate is reduced from 10% to 5% the gross amount, in case dividend distribution from a direct shareholding of at least 25% (held over 365 days); for other types of dividends, a 10% WHT rate still applies.

• Interest: the applicable WHT tax rate not exceeding 10% of the gross amount of interest paid, with a newly-introduced reduction to 8% for those related to loans (over three years) paid to financial institutions. Also, an exemption is provided for the interest paid by or to the other county’s Government or political subdivision, local authorities thereof, Central Bank, public entity or an entity whose capital is wholly owned by the Government (such as the Bank of Italy, CDP, SACE and Simest), as well as paid on loans guaranteed or insured by the same.

• Royalties: for payment of royalties related to the use – or right to use – of any literary, artistic, scientific, patent, trade mark, design, plan, formula and other intellectual property, the applicable WHT rate is still 10%. However, the WHT rate is reduced to 5% for the use, or right to use, of industrial and scientific equipment (that is, the WHT rate of 10% is applicable on 50% of the royalties, reduced from the previous 70%).

• Tax Residence: in case of a person’s (other than an individual) residence in both States, the Agreement eliminates automatic attribution of its residence in the State where the head office or place of effective management is situated. In such circumstances, to determine the State of residence, an agreement between the competent authorities of the two States shall be required, absent which agreement, any relief or exemption from tax provided by the Agreement shall not be entitled. 

• Employment Income: where employment is exercised in both States, the relevant period (or aggregate periods) for the determination of taxation of a State resident’s remuneration shall be the presence of the recipient in the other State for no more than 183 days in any twelve month period commencing or ending in the fiscal year concerned rather than in the calendar year concerned.

• Permanent Establishment: may also include, for temporary projects such as building site, a construction, assembly or installation project, where the continue for more than 12 months – thus, increased from the minimum of 6 months. Therefore, short-term projects shall no longer automatically be considered permanent establishments, limiting the double taxation risks in case of relevant temporary activities. It ha salso been further specified, for the cases related to furnishing services, the period (or aggregating period) of over 183 days – rather than six months – within any 12-month period.

The new Agreement between Italy and China offers a unique opportunity for entities of both countries, such as Governments with its bodies, companies as well as individuals. By eliminating double taxation, the new Agreement brings further clarity to circumstances at risk of tax redundancy and overlaps, making it simpler and more convenient to carry out business between the two countries by its residents. Updates on the withholding tax rates of dividends, interest and royalties make investments in both countries more efficient, incentivizing Italian companies to look with greater interest at the opportunities offered by the Chinese market. The withholding tax reductions, especially for corporate holdings, would be benefit the interest of companies seeking to expand their presence in China and Italy, and attract mutual investments such as those eligible for the withholding tax exemptions on interests paid in relation to bonds, loans and securities issued – or guaranteed – by the respective Governments and relevant government-related bodies, authorities and entities. In addition, with clearer tax residency and an updated definition of permanent establishment, the new Agreement offers greater legal certainty, reducing tax uncertainties and making it easier to manage international operations.

The Agreement is an important step in strengthening economic ties between Italy and China, facilitating bilateral trade and investment. Its updates not only make the tax environment for businesses more favorable, but also improve the competitiveness of business between the two countries on a global scale. 

PHC Advisory is a company of  DP Group: an international professional services conglomerate of companies with approximately 100 experienced professionals worldwide. We offer comprehensive services in tax, accounting, and financial consulting, including financial supervision, financial audit, internal audit, internal control over financial reporting, and support for audited financial statements and annual audits, ensuring clients' financial transparency and compliance. 

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The content of this article is provided for informational purposes only, financial advice must be tailored to the specific circumstances on a case-by-case basis, and the contents of this article do not legally bind PHC Advisory with the reader in any way. 

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