Prada listing puts tax treaty with Italy on fast track
Amanda Lee and Enoch Yiu
Hong Kong is set to accelerate efforts to sign a double-taxation treaty with Italy, after seven years of talks.
The news coincides with criticism of a planned initial public offering by Italian fashion house Prada over double taxation, although the government has not said whether this is a factor in its negotiations. Prada aims to raise up to HK$20.3 billion in its IPO.
A spokeswoman for the Treasury Bureau yesterday confirmed that the government was discussing double-taxation prevention with Italy, but declined to comment on when an agreement would be made.
A deal would allow individuals or companies to offset tax paid in one country against tax payable in the other.
The sale of shares in Prada, which is set to be the first Italian company to list on the Hong Kong stock exchange, has been marred by investor concerns over a capital gains tax and withholding tax on dividends that Hong Kong shareholders must pay under Italian law.
Italy and Hong Kong have not yet signed a double-taxation treaty. That means Hong Kong residents who buy Prada shares will be liable under Italian law to 12.5 per cent tax on gains earned by selling their holdings and a withholding tax of 27 per cent on dividends.
Brokers said the reception for Prada had been weaker than expected, partly due to investors' concerns about their potential tax liability.
Tim Lui, a partner with accounting firm PricewaterhouseCoopers, said the Hong Kong government had initiated double-tax negotiations with Italy in October 2004. The most recent talks were held last October but he expected that they would resume shortly.
'If Italy and Hong Kong could sign the double-taxation treaty, it would eliminate or at least reduce the tax burden faced by Hong Kong investors when buying Prada shares or other Italian companies listed in Hong Kong,' Lui said.
Hong Kong has signed similar treaties with the mainland, Britain, Australia, Thailand, Belgium and Luxembourg. Under these treaties, investors buying shares from companies based in these countries but listed in Hong Kong are liable to pay a smaller amount of dividends tax or capital gains tax, or none at all.
'Hong Kong and Italy have been negotiating the double-taxation treaty for some time. With the Prada listing and other Italian firms that choose to float in Hong Kong, the two governments may speed up the negotiation,' Lui said.
But he warned: 'Sometimes even after the treaty is signed, there's a lot of paperwork to follow. This means investors may need to wait for months or even a year before they can enjoy tax benefits after the treaty is signed.'
Taiwan and Italy are said to be in the final stages of double-taxation talks, and are expected to reach agreement on the issue soon.
China has had a double-taxation agreement with Italy since 1990, according to the website for the Chinese embassy and consulate in Italy.
The withholding tax liability payable on dividends in Italy
- A 12.5 per cent capital gains tax is payable when the shares are sold