In a case that may have implications for the Republic, the European Court of Justice has been advised to uphold a challenge to UK dividend rules.

The court has been advised by an advocate general that it should find against the UK in a case concerned with the taxation of dividends received by UK companies from companies resident in other member states.

Unlike most continental European countries, the UK and the Republic tax dividends received by domestically resident companies from companies elsewhere in the EU. Credits are allowed for corporation tax paid elsewhere but, in the Republic, dividends from other EU states where the corporation tax rate is above 25 per cent would suffer Irish tax.

The advocate general, in the Franked Investment Income Group case, said the UK's rules were contrary to EU laws on the free movement of establishment and free movement of capital.

The court's decision is not expected for several months and while it can decide not to follow the opinion of the advocate general, this would be unusual.

Kevin McLaughlin, a tax partner with Ernst & Young, said that if the court ruled as the advocate general has advised, it would have implications for the Republic. He said several Irish firms with subsidiaries abroad had already lodged claims with the Revenue Commissioners.

He said a change in Irish rules could encourage Irish companies with EU subsidiaries to bring more cash back into this economy. It would also add to the attractiveness of the Republic as a location for the headquarters of multinational operations.