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International companies operating in Europe may be able to reclaim substantial sums of money from national exchequers after a preliminary ruling in Europe's top court found Britain's tax rules on company losses breached European law.
The case brought by Marks and Spencer, the UK retailer, has implications for many EU states. It is one of the most significant of a series of high-profile cases in which the European Court of Justice has argued that national tax rules that treat domestic and international transactions differently are illegal under EU law.
M&S brought the case because it wanted to offset losses incurred by subsidiaries in Germany, Belgium and France against the profits made by its UK business.
The opinion put forward by Miguel Poiares Maduro, advocate-general, at the ECJ on Thursday was hailed by tax experts as a partial victory for the taxpayer. He said tax rules that did not allow a parent company to deduct losses of subsidiaries operating elsewhere in the EU were "incompatible with community law".
But in an important caveat, he added that companies should not be able to make use of the tax losses twice. If they can offset the tax losses against profits in the country where their subsidiary is based, they should not also be able to do so in the parent company's base country.
Advocates-general's opinions are advisory only - but they are followed by the full court in about 80 per cent of cases. A final decision is expected this year.
Although this opinion dealt with the UK, it has ramifications for EU states with similar rules. Only Austria, Denmark and Italy are not expected to be affected. The German government unsuccessfully argued against offsetting foreign losses because it would reduce tax revenues.