Tax treaties and double tax agreements between two jurisdictions are an excellent tool to boost and strengthen the bilateral economic relationship and promote cross-border investments. Currently, thousands of tax treaties and arrangements are in force worldwide.
Based on international law, double tax agreements shall generally be approved and ratified by both contracting States through their own internal legal procedures necessary for it to enter into force. Both contracting States shall then notify each other of the completion of the procedures, and the agreement would usually enter into force after mutual receipt of notification according to a specific timeline set in the agreement or in the ratification documents.
The process of ratification of the Double Tax Agreement (‘DTA’) between the Italian Republic and the People's Republic of China, signed on March 23rd 2019 has moved a step forward with the approval of the draft bill by the Senate on July 8th, 2020.
Both countries will now follow their respective processes for approving and ratifying the treaty
The previous China-Italy tax treaty was signed on October 31st, 1986, effective from November 14th, 1989 and applicable since January 1st 1990. ( ‘old DTA’)
The new tax treaty updates the previous one and includes OECD / G20 Base Erosion and Profit Shifting (BEPS) recommendations which common aim is the elimination of the double taxation without creating opportunities for non-taxation or reduced taxation by the means of tax evasion or avoidance, including through treaty-shopping arrangements.
In particular, the new DTA will:
• change the days test for employment and independent services from 183 days in a calendar to the test of 183 days in (rolling) twelve-month period.
• include a new paragraph for termination payments which will be taxable in the country where the duties were performed
• stipulate that directors’ fees will be taxable in the country where the company is resident.
• decrease, from 10% to 5%, the withholding tax on dividends paid to beneficial owner holding directly at least 25% of the capital of the company that is paying dividends throughout a 365-day period before the payment;
• reduce, from 10% to 8%, the withholding tax on interests paid to financial institution on a loan with a term of at least 3 years for the financing of investment projects;
• exempt from Italian taxation the interest deriving from securities issued by Bank of Italy, Cassa Depositi e Prestiti, SACE and Simest and paid to beneficial owners resident in China;
• decrease, from 7% to 5%, the withholding tax on royalties for the use of, or the right to use, industrial, commercial, or scientific equipment;
• exempt from taxation the capital gain deriving from certain equity transfers since only capital gains deriving from the transfer of participation of at least 25% at any time over the 12 months prior to the sale will be considered taxable.