On January 14, 2013, in Hong Kong, Hong Kong’s Secretary for Financial Services and the Treasury Professor KC Chan and the Italian Minister of Economy and Finance Vittorio Grilli signed a bilateral double taxation agreement (DTA).
Professor Chan said that the DTA, the 27th such agreement concluded between Hong Kong with its trading partners, clearly sets out the allocation of taxing rights between the two jurisdictions, and the relief on tax rates on different types of passive income.
He added that the DTA should help investors better assess their potential tax liabilities from cross-border economic activities, further strengthen economic and trade ties between the two places, and provide added incentives for Italian companies to do business or invest in Hong Kong.
In the absence of the DTA, income earned by Italian residents in Hong Kong is subject to both Hong Kong and Italian income tax. Under the agreement, tax paid in Hong Kong will be allowed as a credit against tax payable in Italy.
Furthermore, without a DTA, the profits of Hong Kong companies doing business through a permanent establishment in Italy may be taxed in both places if the income is Hong Kong sourced. Under the agreement, double taxation will be avoided in that any Italian tax paid by the companies will generally be allowed as a credit against the tax payable in Hong Kong in respect of the income.
Hong Kong residents receiving interest from Italy are currently subject to Italy’s withholding tax, which is 20% at present. Under the DTA, such withholding tax will be capped at 12.5%. In addition, the Italian withholding tax on royalties, currently at an effective rate of 22.5% (the rate is currently 30% but the tax is applied to 75% of the gross amount of the payment), will be capped at 15%, and the Italian dividends withholding tax on Hong Kong residents will be reduced from the current rate of 20% to 10%.
Under the agreement, Hong Kong airlines operating flights to Italy will be taxed at Hong Kong’s corporation tax rate (which is lower than that of Italy), and will not be taxed in Italy. Profits from international shipping transport earned by Hong Kong residents that arise in Italy, which are currently subject to tax there, will not be taxed in Italy.
The Hong Kong/Italy DTA, which has also incorporated an article on the exchange of tax information, will come into force after the completion of ratification procedures on both sides.