(CN) - The U.K. illegally amended its tax scheme to stymie corporations from collecting on overpayments, the EU's highest court ruled Thursday.
In 2001, the Court of Justice of the European Union found that aspects of the U.K.'s corporate tax code - called ACT and in effect from 1973 through 1999 - violated the EU's freedom of establishment and free movement of capital principles.
After that finding, media giant Aegis sued the British government to recover the ACT tax it had paid over a 25-year period. And under U.K. law at the time, Aegis had a case: The Kleinwort-Benson remedy permitted restitution of taxes paid by a mistake in law and set the statute of limitations at six years from time of discovery, in this case the EU court's 2001 ruling.
British lawmakers responded to the EU court's ruling by amending Kleinwort-Benson in 2004. They exempted decisions made by the U.K. tax authority, deleted the statute of limitations, and made the whole affair retroactive to actions filed on or after Sept. 8, 2003 - the exact date Aegis filed its claim.
Aegis naturally turned to the U.K. courts, which in turn lodged questions of constitutionality with the Court of Justice of the European Union.
In its ruling, the Luxembourg-based court stated that while member state legislatures are certainly free to amend their tax codes, they must provide reasonable transition periods that allow taxpayers to correct mistakes.
"Whilst national legislation reducing the period within which repayment of sums collected in breach of EU law may be sought is not incompatible with the principle of effectiveness, it is subject to the condition not only that the new limitation period is reasonable but also that the new legislation includes transitional arrangements allowing an adequate period after the enactment of the legislation for lodging the claims for repayment which persons were entitled to submit under the previous legislation," the court wrote. "Such transitional arrangements are necessary where the immediate application to those claims of a limitation period shorter than that which was previously in force would have the effect of retroactively depriving some individuals of their right to repayment, or of allowing them too short a period for asserting that right."
The court continued: "It follows that national legislation curtailing, retroactively and without any transitional arrangements, the period within which repayment could be sought of sums collected in breach of EU law is incompatible with the principle of effectiveness."
Failure to transition into tax code changes also violates the EU's principles of legal certainty and the protection of legitimate expectations, the EU high court noted, remanding the case to the Supreme Court of the United Kingdom for final disposition.
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