International Taxation: ratification of Italian treaties with Libya, Liechtenstein, and China on-going

published on 10 May 2024 | reading time approx. 4 minutes

The Council of Ministers on April 15, 2024, approved three draft laws ratifying the Conventions against double taxation signed by Italy with Libya, Liechtenstein and China.

The Conventions against double taxation are bilateral agreements, generally drafted according to the OECD standard, negotiated, and signed between two contracting States. Their validity is linked to ratification and subsequent exchange of ratification instruments. In Italy, this ratification takes place by means of an ordinary law.

In this regard, the three draft laws approved by the Council of Ministers on April 15, 2024, start the ratification of three different Conventions against double taxation signed in previous years by Italy respectively with:

Libya. in this case, the Treaty between Italy and Libya was signed in Rome on June 10, 2009, and until today it had not yet been ratified. This Convention is in line with the pre-2017 OECD Model except for:

the management of conflicts of double residence of companies, to be resolved not automatically with the criterion of the place of effective management but by agreement between the tax administrations of the countries;
the presence of a general clause whereby, unless otherwise provided, income from one State is also subject to taxation in that particular State;
the imposition of self-employment income, taxed on non-residents by virtue of staying in the other State for periods of at least 183 days as well as in the presence of a fixed base.

Liechtenstein. This Convention is the most recent having been signed on July 12, 2023, and was drafted in accordance with the 2017 OECD model providing that:

as for dividends, a general principle of taxation in the source State equal to 10 per cent is envisaged. Exception to this principle occurs in the presence of a partnership resident in the other State that holds, even indirectly, at least 25 per cent of the issuing capital in the 365 days preceding the payment. In this case, in fact, the rate is zero;
for interest and royalties, the maximum tax rates in the source State are both equal to 10 per cent.

China, Italy’s second-largest trading partner in terms of imports after Germany and tenth for exports (ICE data for 2022). Italy signed, on March 23, 2019, a new Convention with China that innovates in various ways the Treaty between the two countries dating back to 1986 and currently in force. In particular:

the 1986 Convention provides for a maximum dividend tax rate in the source State equal to 10 per cent. The new Treaty, on the other hand, introduces a reduced rate of 5 per cent if the beneficiary of the profits is a company that directly holds at least 25 per cent of the capital of the company that pays the dividends for an uninterrupted period of 365 days;
with reference to the taxation of interest, the 1986 Convention provides for a 10 per cent withholding tax zeroed for interest paid to the other State, to its local entity, to its central bank or to an entity entirely owned by that State. With the new Convention, the ordinary rate is accompanied by a reduced withholding of 8 per cent for interest paid to a financial institution in relation to a loan granted for a period not less than three years for the financing of investment projects;
for royalties, the principle of concurrent taxation is maintained, however, establishing two distinct regimes. In fact, for royalties paid in return for the right to use trademarks, patents, software, etc., the 10 per cent levy on the total of the fees paid remains unchanged. Instead, for royalties paid in return for the right to use industrial, commercial or scientific equipment, the rate is always equal to 10 per cent but on a taxable base reduced by 50 per cent.