June 30 is the most significant annual deadline for Chinese companies: the Annual Inspection. This compliance activity requires companies to submit information about their business activities to various authorities for the annual renewal of their licenses. For foreign-invested Chinese companies, in addition to the Annual Inspection, they must undergo an annual financial audit by an independent audit firm registered in China and submit the CIT settlement, which is the annual corporate income tax declaration. Only after completing these three stages can dividend distribution be considered.
If the shareholders of a foreign-invested company in China are Italian legal entities, according to the double taxation agreement between the two countries, dividend distribution is possible after setting aside 10% as a reserve (up to 50% of the capital) and paying a 10% withholding tax in China. It is important to note that while the 1986 convention is still in effect, a new convention is being ratified, which will lower the withholding tax rate from 10% to 5%. If the dividends are reinvested in China to establish a new entity, the withholding tax will be temporarily exempted.
Once the Italian company receives the dividends, they will be taxed in Italy under the Participation Exemption (PEX) since China is included in the "white list" of countries. As the PEX only subjects 5% of the dividend to the IRES tax, the taxation in Italy will be lower than the withholding tax applied in China. Therefore, it is possible to request a tax credit in Italy for the amount paid in China. To do so, a Withholding Tax Certificate, obtained from China, must be translated into Italian, preferably by a court-registered translator, and attached to the supporting documentation for the tax declaration.
For individual Italian shareholders, the tax treatment is different. According to Chinese regulations, non-resident shareholders are not subject to withholding tax in China. However, residency status plays a significant role. If the individual shareholder is also a resident, the dividend will be subject to a 20% tax in China.
