The Agreement between the Government of the People's Republic of China and the Government of the Italian Republic for the Avoidance of Double Taxation on Income and the Prevention of Fiscal Evasion took effect on 1 January 2026, replacing the previous agreement signed in 1986. This long-anticipated upgrade marks a significant step forward in bilateral tax coordination, providing a clearer, more modern, and more investment-friendly framework for cross-border activities between the Mainland of China (“China”) and Italy.
By refining withholding tax rules on dividends, interest and royalties, the new treaty is designed to reduce tax friction, improve certainty and better align tax outcomes with the commercial substance of transactions. For enterprises engaged in cross-border investment, financing and technology or equipment cooperation, these changes can translate directly into lower tax costs and improved project returns.
From a withholding tax planning perspective, investors should reassess shareholding structures, financing terms and royalty arrangements to ensure treaty eligibility before payment execution in China.
In this article, we discuss:
- Withholding tax on dividends: reduced rates for long-term strategic shareholdings
- Withholding tax on interest: preferential treatment for long-term and project financing
- Withholding tax on royalties: lower effective tax on equipment and technology usage
- How we can support
- Frequently asked questions
Withholding tax on dividends: reduced rates for long-term strategic shareholdings
Under the previous treaty, dividends paid by a company in one contracting state to a resident of the other state were subject to a uniform withholding tax cap of 10%, regardless of the level or duration of shareholding.
The upgraded treaty introduces a more differentiated approach. Where the beneficial owner of the dividends is a company that has directly and continuously held at least 25% of the capital of the dividend-paying company for at least 365 days (including the payment date), the withholding tax rate is reduced to 5%. Dividends that do not meet this threshold remain subject to the 10% cap.
This reduced rate delivers tangible tax savings for long-term equity investors and clearly encourages deeper, more stable strategic participation rather than short-term financial holdings.
Practical example: dividend withholding tax savings under the new treaty
Assume Chinese Company A receives annual dividends of EUR 1 million from Italian Company B.
- Under the previous treaty: 10% withholding tax = EUR 100,000
- Under the new treaty (meeting the 25% / 365-day requirement): 5% withholding tax = EUR 50,000
Withholding tax on interest: preferential treatment for long-term and project financing
The new treaty replaces the former single-rate approach with a three-tier structure that reflects the lender’s profile, the loan purpose and its duration.
Interest paid to the government, central bank, or a wholly owned public institution of the other contracting state, or interest on loans guaranteed or insured by such institutions, is fully exempt from withholding tax. Interest paid to a financial institution for loans of three years or longer that are used for investment projects qualifies for a reduced 8% rate. Other interest payments remain subject to the 10% cap.
This structure lowers financing costs for qualifying long-term projects and supports large-scale Sino-Italian cooperation.
Practical example: interest withholding tax on cross-border project loans
Suppose Chinese Bank C leases Italian Company D a five-year project loan of RMB 200 million to build a highway in Italy, with annual interest payments set at EUR 8 million.
- Under the previous treaty: 10% withholding tax = EUR 800,000
- Under the new treaty (qualifying loan): 8% withholding tax = EUR 640,000
Withholding tax on royalties: lower effective tax on equipment and technology usage
The updated agreement maintains the existing cap of 10% on the general royalty rate, while offering enhanced terms for specific categories of fees. Previously, the use of industrial, commercial or scientific equipment resulted in an effective tax rate of around 7% on the full royalty amount. Currently, only 50% of the total amount is subject to taxation, meaning that even though the maximum tax rate remains at 10%, the actual tax burden is reduced to 5%.
This change will lower the tax barrier for exporting advanced technologies such as high-end equipment and production lines. Consequently, the effective tax rate for equipment usage fees has been reduced from 7% to 5%, facilitating enhanced competitiveness for Chinese companies and Italian companies operating in China in global pricing and profit margins.
Practical example: equipment usage fees and reduced royalty tax exposure
Suppose Chinese Company E leases machinery and equipment to Italian Company F for production operations in Italy. The annual fee for equipment usage is set at EUR 500,000.
- Under the previous treaty: 70% of the payment constituted the taxable base, resulting in withholding tax of EUR 35,000.
- Under the new treaty: the taxable base is reduced to 50%, lowering the withholding tax to EUR 25,000.
Conclusion
The upgraded China-Italy tax treaty represents a comprehensive recalibration of bilateral tax rules. By lowering withholding tax rates on qualifying dividends and interest, and by reducing the effective tax burden on equipment-related royalties, the treaty materially decreases the cost of cross-border investment, financing and technology cooperation.
More importantly, it rewards long-term shareholding while also supporting project-based and government-backed financing. Furthermore, it aligns tax outcomes more closely with economic substance. For enterprises operating between China and Italy, this creates a more predictable, transparent and efficient tax environment, enabling deeper cooperation, improved capital allocation and more sustainable long-term growth.
How we can support
In order to fully comprehend the advantages offered by the China–Italy tax treaty, it is necessary to consider more than just the headline tax rates. In practice, the efficacy of treaty relief depends on the structuring, documentation and execution of transactions, as well as the alignment of contractual terms, commercial substance and regulatory filings.
Hawksford supports multinational and China based enterprises throughout the full lifecycle of China–Italy cross border transactions. Our services include treaty eligibility assessment, withholding tax analysis, and support with required tax filings and registrations for outbound non trade remittances. We also work with banks and relevant authorities, where required, to coordinate payment execution, helping to support that treaty benefits are applied correctly and efficiently.
Combining in-depth know-how in international tax and China regulatory practice with hands on execution support, Hawksford assists clients in managing withholding tax exposure, managing compliance risk and achieving more stable, predictable cross border cash flows between China and Italy.
This article is intended for general information purposes only and does not constitute tax, legal or investment advice. The application of treaty benefits is subject to applicable laws, regulations and specific transaction circumstances.
Frequently asked questions
What are the main benefits of the China-Italy Double Tax Agreement?
The upgraded China–Italy Double Tax Agreement (DTA) streamlines bilateral tax rules and reduces cross-border tax friction. The key benefits of the new agreement are as follows:
- A reduced withholding tax on dividends, introducing a 5% rate for qualified corporate shareholdings held long-term
- Preferential withholding tax on interest income, offering exemptions for certain government-backed loans and an 8% rate for eligible long-term project financing
- Lower effective tax rates on equipment-related royalties, decreasing the actual liability to 5%
- Improved certainty and closer alignment with OECD standards, facilitating strategic investment planning for both China and Italy
How can companies claim tax relief under the China-Italy DTA?
China has implemented a self‑assessment and reporting framework for qualifying Italian enterprises seeking to benefit from the DTA. This framework eliminates the need for prior tax authority approval.
In practice:
- The non‑resident taxpayer assesses whether treaty conditions are met (such as tax residence, beneficial ownership, or holding period).
- A Reporting Form for Non‑resident Taxpayers Claiming Treaty Benefits is completed and submitted, usually via the Chinese withholding agent when income is paid.
- Supporting documents are not filed upfront but must be retained for potential post‑filing review by the Chinese tax authorities.
Tax authorities may conduct follow‑up checks, and treaty benefits can be denied if eligibility or documentation requirements are not satisfied.
What are the tax implications for Italian businesses operating in China?
Italian companies investing or conducting operations in China may benefit from the DTA as follows:
- Minimising tax leakage during profit repatriation, with particular advantages for long-term equity investments
- Reducing financing costs for eligible cross-border loans
- Enhancing tax efficiency for business models involving technology, intellectual property, and equipment
- Elevating the significance of permanent establishment risk management, particularly for on-site projects and services provided within China
Are there any specific tax incentives for Italian exporters to China under the DTA?
The DTA does not provide direct trade or export incentives. However, Italian exporters may still benefit indirectly where their business model involves:
- equipment leasing or usage fees, which may qualify for reduced royalty taxation; or
- IP licensing or financing arrangements, where treaty withholding tax caps apply.
Please note that customs duties, VAT, and trade incentives are not covered by the DTA.
How does the China-Italy DTA affect dividend withholding tax for Italian companies?
Effective from 2026, a 5% withholding tax will apply if the Italian recipient is the beneficial owner, holds a minimum of 25% equity in the Chinese company, and satisfies a holding period of 365 days. In all other circumstances, a 10% withholding tax will be imposed. This revision substantially enhances post-tax returns for eligible long-term investors.
What documents are required to claim DTA benefits in China?
Italian companies generally follow these steps to claim treaty benefits:
- Complete and submit the Reporting Form for Non‑resident Taxpayers Claiming Treaty Benefits.
- Keep supporting documents, such as proof of tax residence and entitlement, in case they are needed for a tax authority review.
While you do not need to submit these documents initially, they should be readily available if requested during after-filing procedures.
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