The European Commission had challenged the compatibility with the EC Treaty of the Italian system of charging withholding tax on dividends paid to parent companies of Italian subsidiaries resident outside Italy.

In previous cases the ECJ had held that discriminatory withholding taxes imposed by the source Member State on dividends paid to another Member State could not be justified by the fact that the other State gave unilateral credit relief for the dividend. In the present case the question was whether the fact that the other State gave a credit under a double tax treaty should make a difference.

The Advocate General concluded that where a Member State’s withholding tax provisions were in breach of the EC treaty (in the present case the free movement of capital under Art. 56) they could be justified by the fact that a double tax treaty provides for a credit, but only insofar as the credit extends to the full amount of withholding tax actually levied by the state of origin of the dividend (“full credit”), rather than being limited to the lower of the withholding tax charged in the country of origin and the corporation tax rate charged in the recipient state (“ordinary credit”).

Justification on the grounds of the prevention of fiscal fraud was again rejected on the basis that the law applied to all dividends and was not aimed solely at artificial arrangements (save for dividends paid to EEA states without exchange of information provisions in double tax treaties).

This opinion would seem to favour the ACT Class 4 claims whose hearing which is set to commence at the end of October.