The Government and credit unions have moved to end two years of tension between them over the taxation of credit union savings and dividends, agreeing to work together to resolve outstanding legal problems.

The Irish League of Credit Unions (ILCU) yesterday accepted the Government position that a complaint made to the European Commission alleging bias in favour of credit unions under current tax law must be resolved before any further moves were made.

This represents a modification of the position of the credit unions, which said yesterday morning they were seeking immediate action to implement a new tax regime as recommended by a majority of a working group which reported on the issue 18 months ago. However, after a 90-minute meeting yesterday with the Taoiseach, Tanaiste and officials, the vice-president of the ILCU, Mr Jim McMahon, said it accepted legal issues must first be resolved.

"Each side recognised the other had a problem," said Mr McMahon after the meeting. Maintaining the talks had been amicable, he said the Government and credit unions would "fight the battle together in Europe".

The Taoiseach also said yesterday's meeting had been "constructive" and that "the Government is fully appreciative of the role credit unions play in Irish society and the contribution which the movement makes to the wider community".

However, he also stood by the position of the Minister for Finance, Mr McCreevy, that the report of the working group would be examined "in the light of whatever decision the EU Commission takes in the matter".

The presentation of yesterday's meeting as constructive follows two years of tension between the credit unions and the Government, particularly Mr McCreevy. The 1998 Finance Bill imposed DIRT at 20 per cent on credit union dividends, a move which had been sought by the credit unions.

However, the credit unions had also sought an exemption for small savers, which was not granted by the Minister. The ILCU joined the outcry against the proposals when they were announced.

Mr McCreevy withdrew his proposals and established a working group to examine the issue. A majority of that group recommended the imposition of DIRT on dividends, but said that on the first £375 of dividends savers should not be taxed at all. On the next £375, 20 per cent DIRT should be imposed. Savers earning more than £750 in dividends would be taxed at 20 per cent on the entire dividend.

The representatives of the Department of Finance and Revenue Commissioners opposed this exemption. Mr McCreevy has said he is "examining" the working group proposals but is inhibited by the complaint to the European Commission.

Mr McMahon said the Government was now going to refer the recommendations of the working group to the Attorney General to ascertain whether there would be any legal difficulties involved in implementing them.

The Taoiseach said any change in tax law that could be seen to reinforce any bias in favour of credit unions could aggravate the situation in regard to the investigation by the European Commission. He said the recommendations of the working group would be "further examined in the light of whatever decision the EU Commission takes in the matter".