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published: September 2015 on www.hg.org  

The agreement between Hong Kong and Italy for the avoidance of double taxation with respect to taxes on income and the prevention of fiscal evasion has entered into force.

The Hong Kong – Italy double tax agreement entered into force

The comprehensive double tax agreement (“CDTA”) between Hong Kong and Italy was signed in January, 2013 and came into force on 10th August, 2015, after completion of ratification procedures on both sides. It shall be effective with regards to Hong Kong tax for any year of assessment beginning on or after 1st April, 2016.

The three milestones achieved by the Hong Kong – Italy CDTA

The three milestones achieved by the Hong Kong – Italy CDTA are outlined in the table below.

1

Hong Kong has all along been committed to expanding its network of comprehensive agreements for the avoidance of double taxation with trading and investment partners, and has signed 32 CDTAs so far, including this one with Italy.

2

The CDTA between Hong Kong and Italy will bolster the economic and trade connections between the two places, and offer added incentives for companies in Italy to do business or invest in Hong Kong, and vice versa. The CDTA between Hong Kong and Italy has incorporated an article on exchange of information, which is on par with the international standard.

3

The Hong Kong Government believes that the entry into force of the CDTA between Hong Kong and Italy would help address any concerns on the part of the Italian authorities about Hong Kong’s commitment to enhancing tax transparency and combating cross-border tax evasion, thus facilitating the removal of Hong Kong from the ‘blacklist’ of Italy as early as possible.


Case example: the potential tax benefits for Italian making investments in China via Hong Kong

Enjoying largest benefit – using a Hong Kong company as stepping stone

Background

  1. Mr. A is from Italy with Italy company “ITA Ltd”;
  2. Business nature is about consumer products retail;
  3. His business activities with China include:
    • invest in China to setup Wholly Foreign-Owned Enterprise (“WFOE”);
    • also lend money to the WFOE for business operation in China.

New arrangement

  1. Mr. A forms a Hong Kong company “H Ltd”;
  2. Using H Ltd as investor in China to setup the WFOE;
  3. Also using H Ltd to advance shareholder loan for the WFOE’s business in China.

Tax benefits

  1. Setting up WFOE
    • disclosing less information to China government
      • originally, need to provide information of ITA Ltd to China government;
      • now, just need to provide information of H Ltd.
    • time to arrange document is shorter
      • ITA Ltd documents need to be translated into Chinese and be certified by China Embassy;
      • documents from H Ltd is more ready for China use, and the certification process is more standardized in Hong Kong – time and cost more under control.
  2. Dividend from WFOE
    • when China company earns profit and needs to pay out dividend to shareholder, withholding tax in China applies;
    • if paying to ITA Ltd, the rate is 10%;
    • if paying to H Ltd, the rate is 5%;
    • 5% of tax benefits achieved when repatriating dividend to Italy.
  3. Interests from WFOE
    • when back-to-back shareholder loan involved and China company needs to pay out interest to shareholder, withholding tax in China applies;
    • if paying to ITA Ltd, the rate is 10%;
    • if paying to H Ltd, the rate is 7%;
    • 3% of tax benefits achieved when repatriating interest to Italy.

Figure 1:   The tax efficient investment structure for Italian investing in China via Hong Kong

Conclusion

The Hong Kong Government to enhance Hong Kong’s position as an attractive and efficient international financial centre by maintaining its simple tax system and taking positive steps in expanding its double tax agreement network with trading partners. It is suggested that investors from European countries as well as other places can make use of Hong Kong as an ideal platform for doing business and making investment into China.

CONTACT US

Masson de Morfontaine is an international tax and business advisory services firm based in Hong Kong specializes in providing comprehensive professional services for worldwide clients. We are experts helping our clients with practical tax and business advices and keen on advising transfer pricing issues and double tax treaty applications. We are more than welcome to discuss with you about our services. Please call or email us should you require more information.

 

Catherine LE BOURGEOIS
Partner   
+852.3953.4880
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  Wilson YEUNG
International Tax Director
+852.3953.4804
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Disclaimer: This article is issued for information purpose only and it should not be viewed as a professional advice. Accordingly, you should not act solely on the basis of the material contained in this article. We recommend that formal advice be sought before acting in any of the areas.

2015 Masson de Morfontaine Limited.  All rights reserved.

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