Philippe Leger, advocate general of the European Court of Justice in Luxembourg, told the ECJ that laws which allow the British tax authorities to claw back tax breaks earned by UK companies with overseas operations do not conflict with European law, so long as they only apply to cases where the company set up "wholly artificial arrangements intended to circumvent national law."

M Leger did not specify what an "artificial arrangement" was, but set out some general guidelines to be considered when making a judgement.

He said a decision on the tax status of Cadbury Schweppes, the UK drinks and confectionary group, which challenged the British laws in Europe, should be decided in a British court.

Cadbury Schweppes set up a financing subsidiary in Ireland, where taxes are lower than the UK, and challenged the UK’s right to enforce its higher tax rate on its the operation.

A UK court will hear the case once the ECJ has passed its final judgement on the issue. No date has been set for that judgement but lawyers said it is likely to be before the end of the year.

Guy Brannan, global head of tax at Linklaters, the law firm, said: "It’s a partial victory for both sides: The Inland Revenue has had its tax laws ratified by the European Court of Justice but M Leger’s judgement allows Cadbury Schweppes the opportunity to bring its case in a UK court."

Mark Persoff, tax lawyer at Clifford Chance, said: "The Cadbury Schweppes case demonstrates the potentially far-reaching effect of European law on the UK's corporate tax system."

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