The UK tax regime does not ensure equal tax treatment on the profits returned to British firms from their EU subsidiaries, the European Court of Justice in Kirchberg confirmed on Tuesday.

The case at the ECJ involves the so-called “advance corporation tax”, which was collected from 1973 through the late 1990s. Under those previous British tax rules, UK-domiciled companies had to pre-pay tax on dividends distributed to shareholders. Dividends from UK subsidiaries could be treated “franked investment income” which meant parent companies could deduct the payments against the advance corporation tax. But profits from subsidiaries based elsewhere in the EU did not qualify for that relief.

The plaintiffs, led by British American Tobacco, claimed that amounted to double taxation in their case originally brought before the UK courts. The group ultimately won a 2006 decision at the ECJ in Luxembourg. BAT and others then filed a second series of claims seeking refunds, which Britain’s tax authority, Her Majesty’s Revenue and Customs, has opposed. British judges asked the ECJ in Luxembourg for guidance on the need for full refunds or if HMRC could offer reduced settlement amounts.

This week ECJ judges said the taxes were “unlawfully levied” as they restricted capital flows within the EU, and needed to be totally reimbursed.

Estimates of the amount at stake range up to £7 billion, but how far back companies can claim will be determined in a separate ECJ hearing, expected to take place next year. After those proceedings, the matter will go back to the UK courts for final adjudication.

“HMRC is disappointed with this latest ruling,” a spokeswoman for the UK agency told Delano. “We will consider the implications of the ruling in the overall context of the case, which has a number of aspects and complexities that remain to be settled in the domestic courts. There are also further proceedings pending at the European court following a recent Supreme Court reference there for the third time.”

Graham Aaronson, barrister for the claimants, was quoted by the Financial Times as saying “the ruling represented ‘a resounding success’” for his clients.

“Because of the further hearings in the UK and European courts there is currently no tax to be repaid following this judgment,” the HMRC spokeswoman stressed to Delano.

Cross-border tax practices under fire

The ruling marks one piece of positive news for multinational firms in recent weeks. The likes of Amazon, Google and Starbucks were the focus of “tax avoidance” hearings at the British parliament this week, with MPs accusing the companies of funnelling revenue through lower tax jurisdictions, such as Luxembourg and Ireland, to cut their tax bills, and pledging to change fiscal rules to make such manoeuvres more difficult.

Meanwhile, the French government has hit Amazon, which has its EU hub in the Grand Duchy, with a claim for $252 million in back taxes and fines for the practice, the internet retailer disclosed on Tuesday. Google’s CEO said on Monday that he hoped to resolve a billion euro dispute with French authorities.

Najat Vallaud-Belkacem, France’s equality minister and cabinet spokeswoman, said on Wednesday the country was looking at ways to increase its tax take on international web firms.

The German government has also launched an effort to tighten cross-border tax loopholes, and last month the European Commission has told Luxembourg and France to increase VAT on e-books as part of its drive to harmonise taxation within the union.