China-Italy New Tax Treaty signed on 23rd March 2019
China and Italy signed on Saturday 23rd a Memorandum of Understanding (MoU) on the Belt and Road Initiative. Italy's Prime Minister Giuseppe Conte signed the New Silk Road MoU with Chinese President Xi Jinping in Rome, endorsing the global infrastructure-building project.
Conte and Xi shook hands after 29 separate sections of the MoU were signed by members of both governments.
Among the agreements signed, there is also a new Double Tax Agreement (DTA) replacing the previous DTA signed in 1986.
Regarding DTAs, nowadays China signed 107 treaties, while Italy signed 98 tax treaties. Economy Minister Giovanni Tria and the Foreign minister Wang Yi signed the new tax treaty at Palazzo Madama on 23rd March.
Previous China-Italy tax treaty was signed on 1986.10.31, effective from 1989.11.14 and applicable since 1990.1.1. The new tax treaty updates the previous one and includes OECD / G20 BEPS recommendations.
As regards dividends, a reduction in the withholding tax rate has been introduced compared to the previous DTA signed in 1986, from 10% to 5%, in case of qualified dividends, therefore with direct participation of at least 25% of the equity held for not less than 365 days.
This rate reduction will grant a tax benefit to Italian companies that receive dividends from their subsidiaries. Besides, the beneficial rate of 5% for qualified shareholdings will increase the equity ratio allocation for investments in both countries.
Dividends non-qualified (equity lower than 25%) will be taxed with ordinary rate of 10%.
With reference to interests, the measure of the withholding tax applicable in the State of the source may not exceed a rate of 10% of the gross interest amount; A reduced rate of 8% on interest paid to financial institutions is granted in relation to loans with a minimum duration of three years aimed at financing investments projects and tax exemption for interests paid or received by public institutions.
Concerning royalties, the new tax treaty confirms a standard rate of 10% and introduces an effective rate of 5% for payments related to the use or right to use industrial, commercial or scientific equipment. This new rate on royalties is lower than the royalties rates of main European countries where 6% is the rate on similar royalties for DTA with Germany, France, United Kingdom, and Spain.
This new DTA will probably need a few years to be ratified and enter into force. If we look at the recent experiences of France and Germany for example, the new DTA between China and France signed in November 2013 was ratified one year later and entered into force in January 2015; in the case of Germany, the double taxation agreement was signed in March 2014, ratified in April 2016 and became applicable in January 2017. The new Agreement signed in Rome for the Avoidance of double taxation and the prevention of fiscal evasion will grant an advantage in doing business between China and Italy.
