With the press release no. 58 of 23 March 2019 (https://bit.ly/2IaryAl), the Ministry of Economy and Finance announced that the Italian and Chinese governments have signed a new Double Tax Treaty (“Treaty”). Once implemented, this agreement will therefore replace the one of 31 October 1986 (currently in force). As stated in the press release, the aim of the Treaty is to encourage cross-border investment and provide greater tax certainty for companies in both countries, as well as to implement the binding recommendations of the OECD/G20 BEPS project.
Among the most important innovations are the following:
- Dividends (article 10): reduction of the conventional tax rate from 10% to 5% whether the beneficial owner directly holds at least 25% of the share capital of the company paying the dividends for at least 365 days. In any other case the 10% tax rate remains applicable.
- Interest (article 11): reduction of the conventional tax rate from 10% to 8% on interest paid to financial institutions in connection with at least three years loans aimed at financing investment projects. In addition to the already available tax exemptions (e.g., interest paid by the Government or by a local authority or interest paid to the Government, to a local authority, to the Central Bank, to a public authority or to an authority wholly owned by the Government), the Treaty also exempts interest paid in relation to securities issued by Cassa Depositi e Prestiti, such as the so-called “Panda Bond”, received by residents of China.
- Royalties (article 12): reduction of the gross taxable amount of the royalty relating to the use or right to use industrial, commercial or scientific equipment from 70% to 50%. In other words, in such cases the effective conventional tax rate decreases from 7% to 5%. Such provision is particularly favorable as the double tax treaties entered into by China with the main European countries generally provide a 6% tax rate.
- Capital gains (article 13): the Treaty states that capital gains resulting from the sale of a shareholding at least equal to 25% of the share capital of companies resident in one of the two contracting States may be taxed in both countries if this shareholding threshold has occurred at any time during the 12 months prior to the sale. Indeed, the Treaty modifies the “residual clause” contained in paragraph 6 by providing that all capital gains not expressly regulated shall be taxable only in the State of residence of the seller.
At last, the Treaty substantially modifies the definition of permanent establishment, introducing the “anti-fragmentation clause” provided by the BEPS project, as well as a new definition of “independent agent”.