CMS Italy has obtained a fully favourable judgment from the Italian Supreme Court of Cassation on behalf of several German investment funds which claimed the refund of withholding taxes levied on dividends distributed by Italian companies. This is the first ruling of the Court of Cassation on this specific matter, even though it is based on consolidated jurisprudence of the Court itself (concerning, among others, the issue of the interrelation between domestic legislation and bilateral Double Taxation Conventions) as well as consistent jurisprudence of the EU Court of Justice on the violation of the freedom of movement of capital pursuant to article 63 of the Treaty on Functioning of the EU. CMS Italy assisted the German asset management company representing several investment funds based in Germany who had portfolio investments in Italian listed companies which had distributed dividends generally subject to withholding tax at the 15% Treaty rate. The reimbursement claims initially submitted to the competent office of the Italian Revenue Agency (Centro Operativo di Pescara – COP) were rejected. The appeals filed by the claimant to the Tax Courts of first and second instance were also both rejected, on the grounds that it had not been sufficiently demonstrated that a discriminatory difference of treatment existed between the taxation in the hands of the German funds and the taxation which would have been applicable in the hands of a similar Italian fund. With CMS Italy’s assistance, the German asset management company further appealed in front of the Court of Cassation. In the appeals, CMS argued that the second instance Tax Court decisions were wrong because the difference of treatment stems from the comparison of two taxation regimes deriving from the law and does not need any factual demonstration other than the fact that the German funds had actually been taxed at the 15% rate. In determining the existence of such difference of treatment, no consideration should be given to the taxation regime of the fund and its investors in Germany: based on consistent jurisprudence of the EU Court of Justice, in order to ensure the respect of its obligations under the TFEU the source State cannot rely on the remedies (if any) granted by the residence State to avoid double taxation, nor does the Double Taxation Convention between Germany and Italy guarantee, by itself, that a discriminatory difference of treatment is eliminated. The Court of Cassation has fully upheld these arguments, based on a thorough analysis of the relevant EU Court of Justice rulings, and concluded that a discriminatory difference of treatment actually existed because a German investor could have been dissuaded from investing in Italian companies through a German investment fund instead of an Italian investment fund. Therefore, the full refund of the withholding taxes should be executed in favour of the German funds. While the case decided by the Court concerns dividends distributed in 2003, the principles supporting the decision remain valid through all subsequent fiscal years until the change of the domestic law provision occurred starting from January 1, 2021 (see the newsletter at the link for further reference). | 
