New China-Italy Tax Treaty Ratification Approved
On November 5, 2024, the Italian Chamber of Deputies gave final approval for the ratification and implementation of the Agreement between the Government of the People’s Republic of China and the Government of the Republic of Italy to eliminate double taxation on income taxes and to prevent tax evasion and avoidance.
Among the main goals of the agreement, signed in 2019 and unanimously approved, are the prevention of tax evasion and avoidance, the creation of more favorable conditions for Italian companies operating in China, and a more stable regulatory framework for Chinese investors in Italy. The agreement updates the existing bilateral regulations on direct taxation between the two countries.
The ratification of the tax agreement followed a five-year process, during which four governments and two legislatures changed, and it comes just before the visit of the President of the Republic, Sergio Mattarella, to China for the celebrations of the 700th anniversary of Marco Polo's death and the 20th anniversary of the global strategic partnership between Italy and China.
On September 11, 2024, the Italian Senate had already approved the bill for ratifying the new tax treaty with China, subsequently transmitting it to the Chamber of Deputies. The new double taxation agreement (DTA), signed in Rome on March 23, 2019, will replace the previous agreement dated October 31, 1986, and incorporates the OECD/G20 BEPS project recommendations aimed at preventing tax evasion.
According to Italian legislative procedures, the ratification of an international tax agreement requires the standard procedure and final approval by the President of the Republic, after authorization from both the Senate and the Chamber of Deputies through a specific ratification law.
The ratification process of the 2019 agreement required new approval following the change in legislature in October 2022, granted by the Council of Ministers on April 15, 2024. The treaty is expected to come into force on January 1, 2025, following the completion of the ratification in November 2024.
Regarding dividends, a reduction in the withholding tax rate compared to the 1986 DTA has been introduced, lowering it from 10 to 5 per cent for dividends from investments with a minimum 25 per cent equity stake, resulting in halved taxation on dividends distributed after the new agreement's enforcement.
A reduction to 8 per cent is planned for interest paid to financial institutions for loans with a minimum duration of three years aimed at investment projects, while interest paid to or received from public institutions will be tax-exempt.
For royalties, the new tax treaty maintains a standard rate of 10 per cent, with a reduction to 5 per cent for royalties on industrial, commercial, or scientific equipment.
This outcome is highly anticipated by Italian companies in China, as it will allow different profit repatriation strategies. More generally, the implementation of the new tax convention from 2025 will provide greater benefits for bilateral Italy-China investments.