New Italy-China Tax Agreement: Benefits for Businesses
The new tax agreement signed in Rome between Italy and China in 2019 has completed the ratification process and will enter into force in 2025, with fiscal effectiveness starting on January 1, 2026. It introduces significant changes for Italian companies with investments in China.
On December 3, 2024, Law No. 182 of November 18, 2024, was published in the Official Gazette, ratifying and implementing the agreement between the Government of the Italian Republic and the Government of the People's Republic of China to avoid double taxation and prevent tax evasion, signed in Rome on March 23, 2019.
This new treaty replaces the previous one from October 31, 1986, introducing substantial changes in line with the OECD Model of 2017, and brings significant improvements for Italian businesses with economic relations with the Chinese market.
According to Article 29 of the agreement, the treaty enters into force 30 days after the completion of the necessary ratification procedures by both parties and will apply to income received from January 1 of the year following its entry into force. Italian businesses can already assess the potential impacts of these changes in anticipation of its application starting January 1, 2026.
The main changes particularly concern the taxation of dividends, royalties, interest, and capital gains.
The new treaty reduces the withholding tax rate on dividends, lowering it from 10% to 5% for dividends paid to companies that hold at least 25% of the capital of the issuing company for a minimum period of 365 days. In other cases, the rate will remain at 10%. Compared to the previous agreement, which had a general 10% tax rate, this change offers significant advantages for direct investors in China.
The treatment of royalties has been revisited, maintaining a 10% tax rate in both countries. However, for royalties related to industrial, commercial, or scientific equipment, the treaty reduces the taxable base to 50% of the gross value, thereby lowering the withholding rate to 5%. This change encourages technological and industrial exchanges between the two countries.
For interest, the new agreement introduces specific exemptions from withholding tax when the interest is destined for public entities or central banks. This exemption is a significant step toward promoting direct investment between the two countries.
The changes introduced by the new treaty are particularly relevant for Italian businesses operating in China. With the reduced rate on dividends and royalties, and the exemptions on interest paid to public entities, Italian businesses will benefit from a reduced tax burden alongside the increase in bilateral investments. While the benefits apply to both flows, Chinese investments in Italy amount to €2.8 billion, while Italian investments in China are much higher, totaling €15 billion. These investments employ 130,000 people and generate a turnover of €33 billion.
The ratification of the tax convention follows the action plan signed in Beijing by the two prime ministers, Giorgia Meloni and Li Qiang, as part of the strategic partnership between Italy and China, which promotes six main areas of cooperation: trade and investment, finance, innovation, sustainability, healthcare, and culture.