Europe's highest court has ruled against Ireland in a long-running dispute over whether operators importing cars from Northern Ireland should have to pay the full amount of Vehicle Registration Tax up front, even if the vehicle was only being leased for a limited period of time.

The European Court of Justice ruled that by imposing an obligation to pay the full amount of tax up front, Ireland was in breach of EU law.

The Court found that the rules over Vehicle Registration Tax infringe the freedom to provide services across EU borders.

Under Irish law all importers of vehicles are obliged to pay the entire tax liability for permanent vehicle registration.

This is despite situations where a vehicle might be imported for a limited period of time, such as cars that are hired or leased from abroad, or from across the border.

The court heard that Ireland had imposed the rule to protect companies south of the border because the level of Vehicle Registration Tax was cheaper in Northern Ireland.

Irish rules did allow for operators to apply for a subsequent refund of excess tax paid, but this was could only be granted following an inspection and the export of the vehicle in question.

The court also heard that those seeking a refund for excess tax also had to pay a €500 fee.

The European Commission referred Ireland to the Luxembourg Court because it regarded the Irish system as imposing a disproportionate cash-flow and financial burden on Irish residents who wanted to import hired or leased cars for a pre-determined and limited period of time.

The Commission regarded Irish rules as making it considerably more difficult and costly to hire or lease cars from companies outside Ireland.

This in turn infringed the EU freedom to provide services.

The ECJ ruled that the obligation to pay the full amount of registration tax would mean the rental or leasing of vehicles by a company based in another EU member state was more difficult compared to the situation facing an Irish company.

The judgment concluded: "Those measures… have the effect of making the hiring and leasing of vehicles that come from other member states more difficult than the hiring or leasing of vehicles from undertakings established in Ireland."

The rule would deter both Irish residents from availing of vehicle rental or leasing services offered by operators in another member state and would likewise deter such operators from offering those services to Irish residents.

This was therefore a restriction on the freedom to provide services and was incompatible with EU law.

The long-running case dates back to 2003.

In a series of exchanges between the Commission and the government over a 13-year period, the Irish authorities argued that the requirement to pay the tax in advance was in order to avoid giving leasing companies in the North a competitive advantage, since the level of registration tax there was lower than in the Republic.

In January 2012, following pressure from the Commission, the government agreed to set up a refund system so that those importing leased cars into the Republic would get the excess tax back once the vehicle was re-exported.

That refund system was due to come into force in April 2013.

However, in September of that year, the Commission regarded the concession as still not bringing Ireland fully into line with EU law.

According to an argument put forward by the Commission at the time, and included in today's judgment: "The conditions for refunding the tax paid, namely the payment of an administration charge of €500, the compulsory carrying out of technical examinations and the possible loss of interest, taken together, could discourage the provision of cross-border services."

The dispute continued up until 2016, with the government continuing to insist in exchanges of letters with the Commission that the requirement to pay the tax in full in advance was in compliance with EU law.

The government said it would change the law so that interest due on the excess tax would be repaid once the vehicle left the Republic, and it reduced the administrative fee from €500 to €100.

However, the Commission regarded the changes as not being implemented within the time-frame of its earlier warning, or "reasoned opinion". 

The Commission therefore took the case to Europe's highest court because it believed Ireland had not brought its legislation into line with EU law on time.

The court sided with the Commission and rejected arguments from the Government that the Commission had brought the action prematurely and not taken account of changes in Irish legislation.

The court ruled that Ireland was in breach of EU law both in the requirement for importers of vehicles for a temporary period to pay the full registration tax up front, and the requirement to pay a €500 fee to reclaim the excess tax were against EU law.

Ireland was ordered to pay costs.