Italy becomes the first G7 nation to sign a bilateral Memorandum of Understanding (MoU) on the Belt and Road Initiative (BRI) with the Chinese Government. Italian Prime Minister Giuseppe Conte and Chinese President Xi Jinping signed the New Silk Road MoU on 23rd of March, 2019 in Rome, beholding a promise initially put forward in 2018 to Chinese counterparts by Vice-President and Minister for Economic Development, Luigi Di Maio.
BRI refers to the sea and land-based Silk Road economic Belt, China’s master-plan to completely re-shuffle global trade routes, connectivity and international cooperation covering Asia, Europe and Africa. The main goal is to promote market integration and support regional development among developing countries in need for infrastructures and energy related engineering projects.
BRI aside 29 agreements and MoU were signed in Rome in the areas of:
Moreover, 10 other deals in the energy, steel, beef and pork imports, agricultural produce, e-commerce (Suning Pavilion for Italian Luxury Goods), banking, culture and gas pipeline sectors were signed.
The Agreement demonstrates great potential to promote connectivity and strengthen the Belt and Road alignment with the Trans-European Transport Network. The initiative will further strengthen cooperation between the two countries in many areas as ports, logistics, marine transportation and other key sectors for both economies (precision machineries, shipbuilding, textiles).
Among the agreements signed, there is also a new Double Taxation Agreement, which aims at replacing the previous one signed in 1986. The new agreement brings up updates required by OCSE/G20 BEPS guidelines and a reduction in the withholding tax rate for dividends coming from qualified participations, slashing the relevant rate from 10% to 5%. Direct participation is defined as holding at least 25% of the equity and for a period equal or higher than 365 days.
Rate reduction will enable a tax benefit to Italian companies that usually receive dividends from PRC subsidiaries. The new rate of 5% for qualified shareholding will increase the equity ratio allocation for investments in PRC and Italy, encourage higher Equity in JVs (Joint Ventures) and project currently set at rates lower than 25%.
In the field of royalties, the new DTA (Double Tax Agreement) states that the general rate applicable in the State of the source may not exceed 10% on the fees paid for either the use or the concession in use, of a copyright on literary, artistic or scientific works, patents, trademarks, designs or models. On the other side, an effective rate of 5% is introduced (the nominal rate of 10% applies to the amount of 50 per cent of royalties) for payments related to the use or right to use industrial, commercial or scientific equipment. This rate is lower than that laid down for the same types of payments in the agreements concluded by China with the main European Countries, where the maximum reduction is 6%.
Considering Italy’s pivotal role in the European future of the BRI, the advantage can be considered as a first expression of this new framework as long as we consider that OCSE/G20 BEPS principles will be enacted in all those DTAs when time allows.
For M&A targeting Italy, the lowered tax rate related to qualified holdings will further encourage capitalization by Chinese Corporations investing in the country with equity operations in line with the Ministry for Economic Development’s take on greenfield screening.
Following the usual ratification process, the new Agreement signed by the executive power will probably need few months or years to be approved by the legislative assemblies. Once it is implemented, it will support business between Italy and China in the future including potential JVs and cooperation in the two countries under the BRI engagement.
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