LONDON (Bloomberg) — The UK government may have to refund billions of pounds to companies including British American Tobacco Plc and BP Plc after Europe’s highest court ruled the country’s tax system was discriminatory.Twenty companies challenged the UK’s “advanced corporation tax,” which ran from 1973 to 1999, arguing it treated non-UK subsidiaries unfairly. The appeal is one of several to challenge the system, which levied a tax on overseas dividends, while those from UK units were exempt.

EU countries “must treat dividends paid to residents by non-resident companies in the same way”, the European Court of Justice in Luxembourg said in a statement yesterday.

Yesterday’s ruling may lead to lengthy legal battles with tax authorities, said Michael Anderson, a lawyer at DLA Piper LLP in London. While the EU court clearly said the old system was illegal, companies must prove they actually lost out. UK judges will be the final arbiters, he said.

“The Treasury will fight this tooth and nail on a case-by- case basis,” Anderson said in a telephone interview. “As the holders of the nation’s purse strings, it really is their duty.”

The UK estimated in hearings last year that it may face more than $7 billion ($13.7 billion) in refunds. New legislation limiting reimbursement claims may cap that loss at about $400 million, a Treasury spokesman said. The new law is already being challenged in court.

In the same judgment, the Court of Justice said the UK’s current system for taxing dividends is defensible — “a real surprise,” said Guy Brannan, a tax lawyer at Linklaters.

The decision creates “an awful lot of uncertainty”, he said. It is “difficult to understand how it reached its conclusion”.

The court didn’t deal with the key question of whether EU dividends should be exempt from tax in the UK, referring the issue back to the British courts, said Jason Lester, a partner in Ernst & Young’s international tax services team.