The European Court of Justice said in a written opinion today companies could claim tax relief on losses incurred in other European Union countries.
Advocate General Miguel Poiares Maduro said Marks & Spencer was wrongly discriminated against by the British government, and should be allowed to offset losses at foreign subsidiaries against the parent company's profit.
"According to advocate general Poiares Maduro a group relief scheme which does not allow a parent company to deduct the losses of its subsidiaries established abroad under any circumstances is incompatible with community law," the EU court said in a statement.
An advocate general's opinion is typically confirmed in the court's final ruling.
Marks & Spencer made its original application for tax relief to the Inland Revenue in March 2000 and said it would stand to gain over £30 million ($56.32 million) from a ruling in its favour.
The ruling could have far wider fallout as scores of UK companies are also reported to have claimed similar tax relief.
A report presented to Germany's 16 states in February said such European Court rulings could cost Germany billions of euros in lost tax revenues and that preventive action at national level would be needed.