Banks and building societies may complain to the European Commission over the new deal struck between the Government and the Irish League of Credit Unions (ILCU). The Irish Bankers' Federation and the Irish Mortgage and Savings Association, which between them represent all the large financial institutions, said yesterday they would challenge measures giving the credit unions an unfair advantage.

Although the Government seems to believe it can stand over the measures they may be open to a challenge as they include a lower rate of tax than that charged on most bank and building society accounts. They also offer 1.8 million credit union members the option of continuing to receive untaxed dividends. Banks and building societies must deduct DIRT from customers.

The proposals, circulated to credit union members recently, aim to end a three-year stand-off between the Government and the ILCU. Attempts to introduce the automatic deduction of tax from credit union dividend payments in the 1998 Budget ended in a climbdown by the Minister for Finance, Mr McCreevy.

Ms Eimer O'Rourke, the secretary of the Irish Mortgage and Savings Association, said yesterday: "We feel our members' customers should not be discriminated against relative to customers of other institutions." She said the organisation would need to study the contents of the agreement. The director-general of the Irish Bankers' Federation, Mr Jim Bardon, said his organisation also wanted to see details of the arrangements. If the IBF feels the arrangements confer an unfair advantage on the credit union movement then the organisation will take it up with the Commission's competition directorate.

Mr McCreevy refused to comment on the detail of the agreement published yesterday in The Irish Times. "The ILCU is consulting its members at present on this issue and I am not therefore in a position to comment further on the ultimate outcome of the discussions to date," he said. According to the league, the Minister has said he is hopeful the measures will be included in the Budget. The agreement that credit union members can continue to receive untaxed dividends is a significant concession. As recently as last March, the Minister rejected proposals similar to those agreed this month, saying they constituted an "open invitation to people to put their money in savings which will not come to the attention of the Revenue Commissioners".

Credit union members will be able either to continue to receive untaxed dividends as before of else opt to transfer their savings - in the form of credit unions shares - into one of two new special accounts.

The accounts would have fixed periods of three years and five years respectively during which the members would not have access to their shares. The first £350 of dividend income per year would be tax free on the three year account and the remainder would be taxed at 22 per cent subject to a maximum of £750.

The first £500 per year of dividend income would also be tax-free on the five-year accounts, subject to the same maximum which effectively limits the amount of money members can have in these accounts to around £14,000.