Of particular interest in the case, says the firm, are the UK tax rules for dividends. The ECJ has held that the different treatment of UK domestic sourced dividends (which are exempt from tax) and foreign sourced dividends (which are taxable but with a tax credit for overseas taxes suffered) does not contravene EC law. This flies in the face of the Advocate General's view. The case covers other technical areas as well, such as the compatibility of the UK foreign income dividend ("FID") regime where the taxpayer was victorious.

Roopa Aitken, Client Service Director in Grant Thornton's International Tax Team said "Although the tax payer has won on a number of technical areas, on balance the decision represents a points victory for HMRC. The Treasury will be breathing a sigh of relief as they had feared that a favourable ruling would cost them multi-billions. In light of the decision and taking into account legislation recently introduced to reduce the time limits on claims, the Treasury has revised its estimate of the cost to them to £400m."

In some areas the taxpayer has won. For example the ECJ has held that tax credits should attach to foreign dividends received by UK companies so that they can be used to reduce advance corporation tax (ACT) payments. UK companies who have on-paid dividends from companies resident in the European Economic Area and accounted for ACT will now be working out how much they are entitled to recover. Aitken continues "In terms of how much compensation companies can get it is all up for grabs. The calculations will be complex and it seems likely that both sides will fight hard for their case."

The decision will also be encouraging for exempt shareholders such as pension funds which received FIDs. The court has held that the inability to claim tax credit refunds on FIDs is contrary to the freedom of establishment enshrined in the EC Treaty. In order to limit the impact on the UK Treasury of claims under EC law, HMRC introduced blocking legislation in the Finance Act 2004 so that only claims made before 8 September 2003 can go back more than 6 years. Last week's Pre-Budget Report announced further restrictions so that only claims brought within 6 years of the date of the tax being paid will be in-time. Aitken continues "the validity of the 2004 blocking legislation is already being challenged before the courts and it is likely that the new rules introduced last week also breach EC law. Given the amounts of tax at stake it is likely that the new rules will be challenged before the courts and could even end up at the ECJ for it to consider."

Aitken concludes "the FII GLO case considers a number of highly technical areas and the decision is complex. This could allow HMRC the opportunity to look for a narrow interpretation of the ECJ's decision when the case comes back to the UK courts."