Britain broke European Union rules by taxing dividends received by U.K. companies from units elsewhere in the bloc, the EU's top court said on Tuesday in a ruling that will force London to repay huge rebates.
"It emphasises that a member state must treat the payment of dividends at national and cross-border level in the same way if the situations are comparable," the court said in a statement.
However, the European Court of Justice left open as to whether Britain should repay the wrongly deducted tax on foreign dividends from any particular date.
The case centres on the dividends paid to UK-based tobacco group BAT from its subsidiaries elsewhere in the EU.
Dividends received from non-resident subsidiaries were subject to corporation tax, while those from subsidiaries based in Britain were exempt.
In addition, if the company then distributed the foreign dividends to its shareholders, it would be subject to advance corporation tax, while dividends from a UK unit would be effectively exempt via a system of tax credits.
The advance corporation tax can be reclaimed but the process takes months.
BAT said the British system hindered the freedom to set up shop anywhere in the EU, a tenet of the internal market.
Meanwhile, in a separate case, the court said Britain's treatment of corporate dividends paid by a British company to an overseas unit was in line with EU law.