By Anas Almasri
On January 14, 2013 Hong Kong added yet another agreement to its already notable network of double taxation treaties with its trading partners, this time with Italy, taking its tally up to 27.
The special administrative region Secretary for Financial Services and the Treasury Professor KC Chan and Italy Minister of Economy and Finance Vittorio Grilli signed the latest DTA in Hong Kong.
Professor Chan highlighted the benefits such an agreement brings to both jurisdictions, stating that it sets out the allocation of taxation rights and identifies the types of passive income that now qualify for tax relief.
In addition to the DTA role in strengthening trade and investment relations between HK and Italy, he added that it would also aid investors in better assessing their tax liabilities with respect to cross-border business activities as well as encourage Italian companies to enter the HK market.
According to the new agreement, income earned by Italian residents in Hong Kong is no longer subject to both Hong Kong and Italian income tax rates. Income tax paid in HK will be allowed as credit against tax payable in Italy.
In the absence of a DTA, profits earned by a HK company doing business in Italy through a permanent establishment could be taxed in both jurisdictions if the income in question is Hong Kong sourced. Under the double taxation treaty, such companies will be relieved from their double tax burdens in that any tax paid in Italy will generally be credited against their tax payable in HK as far as income is concerned.
Hong Kong residents receiving interest from Italy will also benefit from the recently signed agreement. In lieu of being subject to Italy current 20 percent withholding tax rate, they will now be liable to pay a withholding tax capped at 12.5 percent.
The Italian withholding tax on royalties will also be reduced from an effective rate of 22.5 percent to a maximum of 15 percent. Additionally, the Italian dividends withholding tax for HK residents will be cut down from 20 percent to 10 percent.
Under the DTA, Hong Kong airlines operating flights to Italy will be taxed at HK corporation tax rate which is lower than Italy corporate tax and will not pay any taxes in Italy. Likewise, profits arising in Italy from international shipping transport earned by Hong Kong residents will no longer be taxed in Italy.
The final draft of the agreement also included an article on the accurate and effective exchange of tax information between the two parties and will come into force once both sides finalize their respective ratification procedures
