Italian Cabinet Approves Bill for Ratification of China-Italy Tax Treaty

The Council of Ministers met on Monday, April 15, 2024 at Palazzo Chigi. The meeting was chaired by President Giorgia Meloni, with Alfredo Mantovano, the Undersecretary to the Presidency of the council, serving as secretary.

The Council of Ministers, upon the proposal of the Minister of Foreign Affairs and International Cooperation, Antonio Tajani, approved a bill for the ratification and execution of international conventions and agreements with China concerning income taxes and the prevention of tax evasion.

Ratification and execution of the Agreement between the Government of the Italian Republic and the Government of the People's Republic of China to eliminate double taxation with respect to income taxes and to prevent tax evasion and avoidance, with Protocol, done in Rome on March 23, 2019 (bill)

The text updates the existing Agreement, signed on October 31, 1986, to align the legislation with the recommendations of the OECD/G20 BEPS (Base Erosion and Profit Shifting) project, in terms of combating the phenomena of avoidance and artificial shifting of tax bases. In this way, it will allow Italian companies to operate in China under better conditions and in a competitive position, and will provide greater certainty to Chinese investors in Italy.

The Agreement applies to residents of the contracting States and concerns, for Italy, in particular, IRPEF, IRES, and IRAP. The rules establish the general and subsidiary criteria by which a person can be defined as a "resident of a Contracting State" and the cases in which a permanent establishment is established. Furthermore, the text:

• Regulates the taxability of real estate income, establishing the criterion that it must be taxed in the State in which the real estate generating such income is located, albeit in a non-exclusive manner, following the principle set out in the OECD Model Convention against double taxation;

• Regulates the treatment of profits, as well as profits from the operation—in international traffic—of ships or aircraft. It also provides the regulation of profits from associated companies;

• Provides the rules for the taxation of capital income: dividends, interests, royalties, and capital gains;

• Defines the distribution of taxation in the two Contracting States in relation to: independent professions, subordinate work, members of Board of Directors and supervisory boards, remuneration from artistic and sporting activities, as well as sums received as pensions, for public functions performed, or other incomes received;

• Provides for the criterion of exclusive taxation in the State of residence for any other residual type of income not addressed;

• Establishes the methods for eliminating double taxation, in accordance with the domestic legislation of each Contracting State (in particular, for Italy, the ordinary credit method is provided, which limits the amount of the credit for foreign tax to the portion of Italian tax attributable to the elements of income taxable in China, in the proportion in which they contribute to the formation of the total income);

• Provides for anti-abuse provisions, the principle of non-discrimination, the mechanism of the amicable procedure for the resolution of disputes, the exchange of information, and the relationship with other sources of law to protect the special treatment provided for members of diplomatic and consular missions.