China-Italy Double Tax Treaty 2026: 10 Frequently Asked Questions

The new China-Italy Double Tax Treaty has been applicable since January 1, officially replacing the 1986 framework. The reduced rates on dividends, interest, and royalties are conditional on shareholding, beneficial ownership, and documentation requirements being in place before the first payment is released. This FAQ addresses the 10 most common questions Italian companies are raising as they prepare their 2026 payment flows.

Since the new Agreement between China and Italy for the Avoidance of Double Taxation (China-Italy DTA) entered into force on February 19, 2025, Italian groups with Chinese subsidiaries, licensing relationships, or financing arrangements have been working through the practical implications of the upgrade. The treaty introduces lower withholding tax rates, a more sophisticated capital gains regime, and a Principal Purpose Test (PPT) that gives both tax authorities a new tool to deny treaty benefits.

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The questions below reflect the issues most frequently raised by Italian companies during the transition period, and build on the practical planning guide previously published by China Briefing here. They are intended to complement, not replace, structure-specific advice on individual payment flows.

1. When does the new DTA actually start applying?

The new DTA applies to taxes withheld at source on income derived on or after January 1, 2026, and to other income taxes for fiscal periods beginning on or after the same date. Although the treaty formally entered into force on February 19, 2025, the substantive rules only began to govern payments from January 1, 2026.

For Italian companies, this means that the first 2026 dividend, interest, or royalty payment from a Chinese counterparty is also the first test of whether the treaty file is complete. Payments executed without the documentation in place default to the 10 percent domestic withholding rate, with recovery only available through refund procedures that are slow and uncertain.

2. What are the main benefits of the new DTA for Italian companies?

The new DTA delivers four material upgrades relative to the 1986 framework:

• Dividends: A five percent withholding rate, down from 10 percent, on qualifying corporate shareholdings of at least 25 percent held for at least 365 days.
• Royalties on equipment use: The effective rate falls from seven percent to five percent, by reducing the taxable base from 70 percent to 50 percent of the gross payment.
• Interest: An eight percent preferential rate on qualifying long-term project loans of three years or more provided by financial institutions, plus a full exemption for interest paid to or guaranteed by the government, central bank, or wholly owned public institutions of the other contracting state.
• Capital gains: Most disposals are now taxed only in the seller’s state of residence, replacing the previous concurrent taxation regime.

3. How can Italian companies claim treaty benefits in China?

China operates a self-assessment and retention-of-materials framework. The Italian payee or the Chinese withholding agent applies the treaty rate at the point of payment and retains supporting documents for potential post-payment inspection by the Chinese tax authorities.

No prior approval is required and no application is filed in advance. However, the documentation must be in place at the time of payment and produced if requested during a subsequent audit. The practical consequence is that the burden of proof sits with the Italian taxpayer, not the Chinese authority, and the absence of a documented file at the time of payment is itself a compliance failure, even if eligibility could in principle be demonstrated later.

4. Which documents are required to claim DTA benefits?

The core documents are:

• A Chinese-language tax residency certificate issued by the Italian Revenue Agency (Agenzia delle Entrate) for the relevant fiscal year;
• Beneficial ownership evidence, supported by a substance file covering activities, headcount, premises, and decision-making;
• Shareholding and holding-period documentation for dividend claims, demonstrating the 25 percent threshold and 365-day continuity;
• Loan agreements and use-of-proceeds documentation for interest claims at the eight percent rate; and
• Licensing agreements with equipment or IP descriptions for royalty claims, distinguishing equipment-usage royalties from general IP royalties.

The substance documentation supporting the beneficial ownership analysis is typically the most consequential file. It is also the one most often reconstructed under audit pressure, which is the wrong moment to build it.

5. What is the beneficial ownership test, and why do Italian structures fail it?

Beneficial ownership is the area where Italian claims most often fail. China’s framework, set out in State Taxation Administration (STA) Announcement [2018] No. 9 (Bulletin 9), applies a substance test based on activities, headcount, decision-making autonomy, and onward income flows. A holding entity that exists primarily to receive Chinese-source income and pass it through to another jurisdiction will not qualify as beneficial owner, even if it is formally tax-resident in Italy.

Bulletin 9 narrowed the assessment to five unfavourable factors, but it also expanded the safe-harbour rule for wholly-owned subsidiaries of qualified beneficial owners. The most exposed structures are intermediate holding companies with limited personnel, no independent decision-making over the receipt and use of dividends, and rapid onward distribution patterns.

6. How does the new DTA affect Italian individuals receiving Chinese-source dividends?

Article 23 limits the creditability of Chinese withholding taxes against Italian substitute or final withholding taxes. The main impact is on Italian individuals receiving Chinese-source dividends taxed under the 26 percent Italian substitute tax regime: they can no longer credit the Chinese withholding tax against their Italian liability.

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Review your holding and financing structures to secure treaty benefits under the new China–Italy DTA.

This is a structural change that partially offsets the benefit of the lower Chinese rate, and it is consistent with the principles upheld by the Italian Supreme Court in decisions No. 25698/2022 and No. 10204/2024, which exclude foreign tax credits where the treaty expressly denies them on income subject to compulsory substitute or final withholding tax.

7. What is the Principal Purpose Test, and how does it affect existing structures?

The PPT under Article 24, inspired by Action 6 of the OECD/G20 BEPS Project, allows the tax authorities to deny treaty benefits where one of the principal purposes of an arrangement, transaction, or series of transactions was to obtain a tax advantage. It applies across all treaty claims, not just at the point of payment, and can be invoked at audit.

Holding companies, licensing entities, and intra-group financing structures established under the 1986 treaty should be reviewed for commercial substance before relying on the new rates. The PPT does not require the tax authority to prove the only purpose was tax-driven; it is sufficient to establish that obtaining the treaty benefit was one of the principal purposes. Italian holding and licensing entities with limited operational substance, no third-party customers, and a payment pattern that closely tracks the treaty’s preferential thresholds are the most exposed.

8. When does an Italian service provider trigger a permanent establishment in China?

A service permanent establishment (PE) arises in China where an Italian enterprise provides services through personnel for the same or a connected project for more than 183 days in any 12-month period. The threshold counts days of physical presence of personnel in China, not the calendar duration of the underlying contract. This provision, inspired by the UN Model Tax Convention rather than the OECD Model, favours the source state and is more restrictive than equivalent rules in some European treaties.

Exposure is highest in fashion, machinery, and luxury supply chains, where technical assistance, installation, secondment, and quality control routinely cross the threshold. Once a service PE is triggered, the consequences include corporate tax filing and profit attribution in China, individual income tax obligations for the seconded personnel, and potential social security exposure. Italian companies should map current and forecast service contracts against the 183-day rolling threshold and adjust contractual structures or rotation patterns where exposure approaches the trigger.

9. How does the new treaty interact with China’s 2025 reinvestment tax credit?

Italian companies reinvesting Chinese subsidiary profits in qualifying Chinese projects can combine the new DTA’s reduced dividend rate with the reinvestment tax credit introduced by Announcement No. 2 of 2025, jointly issued in June 2025 by the Ministry of Finance (MOF), the STA, and the Ministry of Commerce (MOFCOM), and clarified by STA Announcement [2025] No. 18 in July 2025.

Accordin to Announcement No.2 of 2025, effective from January 1, 2025, to December 31, 2028, the policy allows eligible investors to claim a 10 percent tax credit on qualifying reinvestment amounts, with unused credits carried forward indefinitely.

Announcement No.2 of 2025 also clearly stated that in cases where China has signed tax treaties that reduce the standard dividend withholding tax rate, the treaty rate continues to apply. This means investors from treaty countries can stack benefits, enjoying both a lower withholding tax and the new reinvestment credit.

Nevertheless, the credit can be calculated at 10 percent of the qualifying reinvestment amount, or the lower applicable treaty rate where one exists (e.g., five percent in the China-Italy DTA). Once this rate is selected, it cannot be changed to a lower treaty (or arrangement) rate when the investment is withdrawn after being held for five years (60 months) and the deferred tax is declared and paid.

That is to say, Italian investors must tradeoff between a higher immediate tax credit benefit and retaining eligibility for future treaty-based withholding tax reductions. Italian groups considering a reinvestment strategy should sequence the documentation for both regimes together, rather than treating them as independent compliance streams.

10. What should Italian companies do before the first 2026 payment is released?

Italian companies with material payment flows to or from China should work through six items before the first post-January 2026 transaction settles:

• Shareholding verification: Confirm that any Italian shareholder claiming the five percent dividend rate has held at least 25 percent of the Chinese paying entity’s capital for a continuous 365-day period covering the planned payment date.
• Beneficial ownership documentation: Refresh the substance file for any Italian holding, financing, or licensing entity receiving China-source income, with current evidence on employees, premises, decision-making, and onward income flows.
• Loan documentation: For interest payments at the eight percent preferential rate, verify maturity terms and produce use-of-proceeds documentation linking the financing to the qualifying investment project.
• Tax residency certificates: Obtain Italian tax residency certificates in Chinese-language format from the Agenzia delle Entrate for any treaty claim, valid for the payment year.
• PPT review: Document the commercial purpose of any holding, licensing, or financing arrangement that could be challenged under Article 24 as motivated by tax considerations.
• Service contract day-counts: Map current and forecast Chinese service deployments against the 183-day rolling threshold and adjust contractual structures or rotation patterns where exposure approaches the trigger.

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Ensure your royalty, dividend, and interest payments meet China’s beneficial ownership and substance requirements.

The new DTA is materially more favourable than the 1986 framework, but the benefits are conditional. Italian companies that have completed the documentation, substance, and structural work before payments are released will be in a position to use the new rates from the first 2026 transaction. Those reconstructing the file under audit pressure will face a more expensive and less certain path.

With rapid reforms and inconsistent enforcement across the region, companies face challenges at every stage of their lifecycle. Dezan Shira & Associates’ tax advisory teams include experienced tax accountants, lawyers, and former tax officials who help clients navigate these complexities, reduce risk, and optimize tax outcomes—providing clients with comprehensive advisory and compliance support tailored to regional requirements.

Ada Zhou

Manager, Tax Service

Talk to an expert at China@dezshira.com

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