British and European pension funds are in line for a multi-million pound windfall after a European court ruling yesterday paved the way for them to claim back taxes charged illegally on foreign dividends.

In a landmark judgment, the European Court of Justice (ECJ) ruled that it was illegal for EU member states to charge so-called withholding tax on dividends paid to foreign companies if the countries’ own companies receive the same payments tax-free.

Although the case did not involve payments to pension funds, tax experts said the ruling was directly relevant and would lead to a flood of copycat claims, allowing pension funds across Europe to escape tax costs.

Richard Little, international tax partner at KPMG, said he would be advising pension fund clients to pursue claims against 12 EU countries which have unfairly taxed UK pension funds.

He said the claims from UK funds alone could be worth “hundreds of millions of pounds”.

Yesterday’s case concerned Denkavit, a Dutch company that successfully sued the French Government for charging withholding tax on dividends paid from its French subsidiary back to the Dutch parent. The ECJ agreed with Denkavit that this was illegal under EU law because France did not levy the same tax on payments from French subsidiaries to French parent companies. In a blow to European exchequers, Denkavit, and a host of other European companies, will now be able to reclaim the illegal taxes.

Guy Brannan, global head of tax at law firm Linklaters, said: “You can apply the same principle to pension funds. If a Spanish company pays a dividend to its investors and the Spanish Government takes a slice of that dividend in tax on payments to UK pension schemes but allows Spanish funds to receive it tax-free then, according to yesterday’s ruling, the UK fund is entitled to reclaim.”

Last year, PricewaterhouseCoopers launched a series of claims with the European Commission against various EU member states on the same issue. The Commission has not yet ruled but Peter Cussons, a tax partner at PwC, said the Denkavit judgment would give a significant boost to the existing cases.