With the introduction of more favourable tax rates, reduced double taxation and incentives for investment in key sectors such as infrastructure and technology, the treaty represents an important step towards a more business-friendly tax environment.
On 5 November 2024, the Italian Chamber of Deputies gave its final approval to the ratification of the new Convention between Italy and China for the elimination of double taxation on income (Double Tax Agreement – DTA), signed in Rome on 23 March 2019. The ratification law (No. 182/2024) was subsequently published in the Italian Official Gazette on 3 December 2024, completing the legislative process required for its entry into force, expected in 2025. However, the treaty provisions will take effect from 1 January 2026, giving companies a transitional period in which to adapt to the new rules.
The primary objective of the new DTA is to eliminate double taxation, prevent tax evasion and create a more favourable regulatory environment for Italian companies operating in China. In line with the 2017 OECD Model Tax Convention, it introduces significant changes compared with the previous 1986 agreement, with important implications for dividends, interest, royalties, capital gains and the definition of permanent establishment.
The ratification process, supported by the Italy-China Chamber of Commerce and Italian government institutions, represents an important step towards strengthening bilateral economic relations. The new provisions will facilitate profit repatriation and improve investment tax planning, providing companies with greater legal certainty and a lower tax burden.
What Are the Financial Implications of Ratifying the Italy–China DTA?
The bill ratifying the new DTA consists of four articles, with Article 3 governing the financial provisions. Starting in 2025, the annual cost of implementing the agreement is estimated at €10.86 million ($11.49 million). These costs will be covered by reducing the special current-expenditure fund in the Ministry of Economy and Finance’s 2024 budget, with part of the resources coming from the reserve allocated to the Ministry of Foreign Affairs.
During the parliamentary debate, Deputy Foreign Minister Edmondo Cirielli highlighted the strategic importance of the new DTA, noting that the agreement reshapes the economic and financial framework between Italy and China. According to Cirielli, the treaty not only strengthens bilateral relations with Beijing but also provides tangible support to Italian companies facing growing international competition. Other European countries have already concluded similar agreements with China, making ratification of the DTA a crucial step in ensuring a competitive environment for Italian businesses.
This ratification forms part of a broader diplomatic and economic commitment, culminating in the official visit of the President of the Italian Republic to China. The high-level meeting reflects Italy’s intention to strengthen economic ties with China and promote a stable regulatory framework for Italian companies operating in the Chinese market.
What Are the Main Changes Introduced by the New DTA?
The new DTA between Italy and China introduces several modernised provisions aligned with international tax principles. Replacing the 1986 agreement, it incorporates measures from the OECD/G20 Base Erosion and Profit Shifting (BEPS) Project and the OECD Multilateral Instrument (MLI). These measures are designed to combat tax avoidance and improve the resolution of tax disputes.
One of the most significant changes is the introduction of the Principal Purpose Test (PPT), which allows treaty benefits to be denied when a transaction is structured primarily to obtain a tax advantage, thereby preventing treaty shopping.
The new DTA also updates withholding tax rates on dividends, interest and royalties, making cross-border investment between Italy and China more attractive:
- Dividends: The withholding tax rate is reduced from 10% to 5% for shareholders that hold at least 25% of a company’s share capital for at least one year. This reduction encourages Italian investment in China and facilitates dividend distributions.
- Interest: The withholding tax rate remains at 10%, but a reduced 8% rate is introduced for loans with a minimum term of three years used to finance investment projects, including those connected with the Belt and Road Initiative (BRI). The new DTA also broadens the list of exempt entities to include Italian institutions such as Cassa Depositi e Prestiti, as well as certain debt instruments such as Panda Bonds.
- Royalties: The agreement reduces the effective tax rate on royalties arising from the use of industrial, commercial or scientific equipment. The effective rate falls from 7% (10% on 70% of the gross amount) to 5% (10% on 50% of the gross amount), making technology transfers between the two countries more cost-effective.
- Capital gains: Article 13 provides that capital gains arising from the sale of qualifying shareholdings of at least 25% may be taxed if that threshold was reached at any time during the 12 months preceding the sale. In other cases, capital gains will be taxable exclusively in the seller’s country of residence, simplifying the tax regime for cross-border investors.
These measures reflect a broader commitment to modernising tax rules, providing greater clarity and reducing the cost of investment between Italy and China. The new DTA promotes a more predictable tax environment and encourages economic cooperation, particularly in the financial, infrastructure and technology sectors.
Benefits for Italian Companies
The new DTA between Italy and China offers Italian companies a range of tangible benefits, particularly for businesses already operating in China or seeking to expand their presence in the Chinese market.
One of the most significant benefits is the reduction in companies’ tax burden, thanks to preferential rates on dividends, interest and royalties. The withholding tax on dividends, for example, falls from 10% to 5% for shareholders holding at least 25% of the shares for a minimum of one year, making the repatriation of profits from Chinese companies more advantageous. For interest payments, an 8% preferential rate is introduced for loans financing investment projects, including those related to the BRI, particularly benefiting long-term investments. In addition, the effective royalty rate falls to 5%, facilitating the transfer of technology and know-how between the two countries. These changes significantly reduce the tax burden on Italian companies, enhancing competitiveness and improving tax planning.
Another major benefit is greater tax certainty. The introduction of clearer rules governing the taxation of cross-border transactions enables companies to avoid potential double taxation and operate with greater transparency. Specific provisions, such as the PPT, are designed to prevent treaty-shopping practices and ensure that tax benefits apply only to legitimate transactions, thereby reducing the risks associated with tax avoidance. A stable and transparent regulatory framework allows Italian companies to plan their long-term operations with greater confidence and without the uncertainty that regulatory changes could otherwise create for investment decisions.
Finally, the treaty provides investment incentives, particularly in strategic sectors such as infrastructure, technology and innovation. Italian companies operating in these areas can benefit from a more favourable tax environment that encourages cooperation with Chinese partners. The tax changes facilitate not only the repatriation of profits but also the development of new alliances and joint projects, potentially creating greater business and growth opportunities in China. The simplifications and tax incentives make cross-border operations more efficient and attractive, fostering strategic partnerships and strengthening the competitiveness of Italian companies in the global marketplace.
Challenges and Key Considerations
Despite these advantages, Italian companies will need to address several challenges in adapting to the new regulatory framework. Compliance with Chinese local tax legislation may prove challenging, particularly for companies that are not accustomed to operating in China, where the tax system can be complex and differs from the Italian system. Furthermore, differences between the two countries’ tax systems may create operational difficulties and require ongoing adaptation.
It is therefore essential for Italian companies to seek support from institutions and trade associations, which will play a crucial role in helping businesses navigate the new tax rules by providing advice and resources to ensure regulatory compliance.
Conclusions and Future Outlook
The ratification of the DTA between Italy and China marks a significant milestone in strengthening bilateral economic relations, consolidating ties between the two countries and creating new growth opportunities for Italian companies. With a more favourable tax framework and greater legal certainty, Italian businesses will be better positioned to expand their presence in the Chinese market, particularly in key sectors such as technology, infrastructure and finance. The growth outlook is particularly promising, with investment flows potentially increasing as a result of the incentives introduced by the treaty.
To fully capitalise on the opportunities created by the DTA, companies will need to make effective use of the tools and resources provided by Italian and Chinese institutions, while adopting careful tax planning practices and ensuring full compliance with applicable regulations.