Hong Kong, 2 December 2015
Hong Kong’s removal from the Italian blacklists
On 30 November 2015, Italy has removed Hong Kong from the list of non-cooperative tax jurisdictions (Italian blacklists).
This important step that is expected to boost the business relationship between the two jurisdictions, has been achieved thanks to the approval of the tax treaty between Italy and Hong Kong (“Treaty”) signed on 14 January 2013. The Treaty will enter into force on the Italian side on 1 January 2016 and on the Hong Kong side on 1 April 2016.
To further defend Hong Kong as a cooperative tax jurisdiction, the HKSAR Government has committed to i) proceed with the work on drafting the legislation for implementing the automatic exchange of information in Hong Kong and ii) continue its effort in expanding Hong Kong’s networks of tax treaty or tax information exchange agreement.
Please find here below a description of the main benefits provided by the entering into force of the Treaty and removal from the blacklists.
1. Investments from Hong Kong to Italy
From the perspective of a Hong Kong investor the main benefits are the following:
a) a) The Treaty reduces the Italian dividend withholding tax rate to 10%, interest withholding tax to 12.5% and royalty withholding tax to 15%;
b) b) No capital gains tax in Italy on transfer of shares of Italian companies unless more than 50% of the asset value of shares derives directly or indirectly from immovable properties located in Italy;
c) c) More certainty on i) the tax residence and ii) taxation of both individuals and companies resident in Hong Kong doing business in Italy.
2. Investments from Italy to Hong Kong
From the Italian perspective, it is important to distinguish from the benefits derived directly from the application of the Treaty and indirectly from the exit of the Italian blacklists which were providing for anti-tax haven provisions (i.e. CFC, deductibility of costs, reverse proof for individuals resident in Hong Kong, etc.).
2.1. Direct benefits from the Treaty
Due to the already favorable Hong Kong tax system, the direct benefits for an Italian investor into Hong Kong will substantially remain unchanged with the entering into force of the Treaty.
As a matter of fact, according to Hong Kong domestic law, dividends and interest are not taxed. Royalties are subject to a withholding rate of 4.95% of the gross amount. In case the royalties are paid to an associated corporation and the intellectual property was previously owned by a person resident in Hong Kong, the withholding rate is equal to 16.5%, reduced to 15% according to the Treaty. Capital gains are not taxed in Hong Kong.
Furthermore, the Treaty provides for i) the application of the tie-breaker rule if an individual or a company is tax resident in both Italy and Hong Kong and ii) more certainty on the taxation of both Italian individuals and companies sourcing business profits in Hong Kong.
2.2. Indirect benefits from the Treaty: removal from the Italian blacklists
The Italian blacklists include those jurisdictions with a low level of taxation and lack of adequate exchange of information. Up to now Hong Kong was on the Italian black lists due to the absence of an effective information exchange between Hong Kong and Italy.
It’s important to note that the Treaty has incorporated an article on exchange of information in compliance with the latest internationally agreed standard. Therefore, information shall be exchanged even if no domestic tax interest is involved or if the information is held by a bank, other financial institution, nominee or person acting in an agency or a fiduciary capacity or because it relates to ownership interest in a person.
The above satisfies the requirements for an adequate exchange of information and therefore Hong Kong has been removed from the Italian blacklists.
Currently, according to Italian domestic tax law, the main benefits from the exit shall be the following:
1) The net income derived by the Hong Kong subsidiary controlled by an Italian parent company shall be taxable only in Hong Kong up to 16.5%, instead of being subject to CFC provisions.
2) Dividends distributed to the Italian parent company shall be subject to Italian corporate tax (IRES) only on 5 % of the entire amount distributed (effective tax rate 1.375%), instead of being taxed on the all amount (if no CFC or ruling).
3) Dividends distributed to Italian resident individuals qualified shareholders of an Hong Kong company, shall be subject to tax (IRPEF) only on 49.72 % of the entire amount distributed, instead of being taxed on the all amount (if no CFC or ruling).
4) Dividends distributed to Italian resident individuals non-qualified shareholders of an Hong Kong company, shall be subject to a withholding tax in Italy equal to 26% of the gross amount.
5) Ordinary deductibility regime applied to transactions involving goods, products and services incurred with an enterprise resident in Hong Kong.
For any further information on the treaty between Italy and Hong Kong please contact:
Dottore Commercialista, LL.M.
Rooms 501-2, Wilson House,
19-27 Wyndham Street,
Central, Hong Kong
Tel: (852) 3102 1995
Fax: (852) 3102 0991