Court of Justice 07-05-1981 ECLI:EU:C:1981:98

Comparison of the undertakings and of the conditions of production

1. The criteria for appraising conditions of production may be of a very different nature and relate not only to economic, social or climatic conditions but also to the legal and administrative conditions for production and to quantitative conditions. The Bundesfinanzhof even invokes the concept of “circumstances of production” based on Article 79 (2) to (6) of the Federal Law on the Monopoly in Spirits. Those provisions concern forms of undertakings which are peculiar to the Law on the Monopoly in Spirits such as distilleries for which production is estimated at a standard level for tax purposes, distelleries run by owners of the raw materials, cooperative fruit distilleries, bonded distilleries, industrial distilleries and bonded fruit distilleries; these forms are described in detail in the Law on the Monopoly in Spirits and in the provisions in implementation thereof; certain of them require official authorization; furthermore, they enjoy other privileges which are not formally laid down in Article 79, such as the exercise of distilling rights in ten-year periods (Brennen im Abschnitt) and the right to a tax-free surplus yield (Überausbeute).

   According to the Bundesfinanzhof the comparison with foreign manufacturing undertakings must thus be made with a large number of German undertakings displaying widely differing characteristics, certain of which owe their very existence to the monopoly in spirits and which would be established in an entirely different form in conditions of free market competition.

2. From the substantive point of view similar conditions for the production of alcoholic beverages cannot be envisaged in regions as different as Guadeloupe, the Federal Republic of Germany or other European States. What the Bundesfinanzhof has done, namely to confront a person relying upon a fact with the impossibility of proving it, presupposes that the comparability of the circumstances of production is not only admissible in law in relation to the objectives of Article 95 of the Treaty but that such comparison is also possible and conceivable in fact. That is clearly not so in this case.

3. In any case such a comparison of undertakings or of conditions of production would in practice be contrary to the prohibition on discrimination in tax matters contained in Article 95: in court proceedings the Member States would be at pains to stress the “special conditions” of domestic production in order to avoid according to imported products equality of treatment in tax matters. Such an interpretation would rapidly bring about the creation of “separate tax markets”; the essential objective of Article 95, namely ensuring the complete neutrality of internal taxation as regards competition between domestic products and imported products, would very quickly be disregarded.

4. In deciding in its judgment in Hansen & Balle that, according to the requirements of Article 95, preferential tax systems must be extended without discrimination to spirits coming from other Member States and that Article 95 does not allow any distinction to be drawn either according to the reasons, whether social or otherwise, on which such special systems are based, or according to the relative importance of such systems as compared with the ordinary taxation system, the Court intended to indicate that the advantage must be accorded as widely as possible. It gave a very wide interpretation to the word “similarity”.

   In its judgment of 27 February 1980 {Commission v France, Case 168/78, [1980] ECR 347) the Court stated that the judgment in Hansen & Balle cannot be understood as legitimating tax differences which are discriminatory or protective; such tax advantages may be accorded at purely national level only in exceptional cases, having regard to the state of development of Community law.

5. Article 79 (2) of the Law on the Monopoly in Spirits is based on considerations peculiar to monopoly systems; it concerns undertakings which are bound within the framework of that Law and of its implementing provisions by numerous legal and administrative conditions; it constitutes a system intended to promote the sale and maintenance of price-levels of agricultural products within the framework of a State monopoly of á commercial character.

   The question submitted to the Court of Justice concerns the wider prohibition of discrimination contained in Article 37 rather than in Article 95 of the Treaty.

6. A distillery for which production is estimated at a standard level for tax purposes may constitute an economic, unit which, through its collaboration with a large number of owners of raw materials, produces several hundred hectolitres each year. A “comparison of undertakings” must not be based exclusively on legal relationships; it must have regard above all to actual economic circumstances which ultimately determine the market and thereby competition.

7. In its judgment in the Schneider-Import case, the Court answered in the negative the question whether a “comparison of undertakings” was to be understood as meaning a comparison of all the conditions of production; it further stated that, apart from the similarity of products, only conditions which may be fulfilled by producers in other Member States justify a varied assessment.

The factor of the volume of production

1. The only relevant factor for Article 95 of the Treaty is the similar nature of the products; the prohibition on discrimination in taxation does not resort to other restrictive criteria.

2. The extension of a tax advantage based on a given volume of production to imported products cannot in any case be envisaged unless three conditions are fulfilled: the volume of production must be attained in a competitive situation; it must be fixed in accordance with clear and objective criteria; it must be justified under national law and Community law and thus be appropriate, necessary and proportionate to the attainment of a legitimate objective. None of these three conditions is fulfilled by Article 79 of the Law on the Monopoly in Spirits in the form in which it existed at the material time.

   The volumes of production which it lays down are purely monopolistic in nature and thus also discriminatory since the percentages are calculated from the basic price of the spirits which itself is fixed by the monopoly administration. A volume of production which is not attained in a competitive situation cannot be extended to other Member States within the framework of the prohibition on discrimination; such an extension leads automatically to fresh discrimination. It is precisely the elimination of such discrimination which forms the objective of Article 37 of the Treaty. It is impossible to uphold within the framework of the interpretation of Article 95 discrimination which arises under a monopoly and which should have been abolished under Article 37.

   The conditions laid down in the former version of Article 79 of the Law on the Monopoly in Spirits are not objective and transparent in nature. They are based on several different types of distilleries whose establishment and method of operating are determined by the specifically national requirements of the Monopoly in Spirits and of the Brennereiverordnung [Distilleries Order]. Furthermore, the various types of distillery are determined by the basic price of spirits which is related to the monopoly arrangements and is fixed each year by the monopoly administration on the basis of considerations relating to the general structure of the monopoly, which introduce into the taxation of imported and domestic spirits a factor unrelated to a true fiscal charge determined on the basis of an objective chargeable event.

   The volume of production fixed in Article 79 is completely unjustified and can only promote objectives which are exclusively monopolistic in nature.

3. With regard to rum produced in Guadeloupe it must be found that in this French overseas department cooperative fruit distilleries are large distilleries and that it is absolutely impossible to transpose to rum the tax advantages accorded in the Federal Republic of Germany to small distilleries. A factual matter, which in itself is objective, like the volume of production, has a discriminatory effect if it can only be attained in the exporting territory by being adjusted to the economic structures of another Member State. The volume of production, a fact which may be established objectively, leads in this case to discrimination.

The factor of the legal or economic unit

1. Only the criterion of economic unity can be adopted in the case of cooperative fruit distilleries; the volume of production, irrespective of the legal structure of the undertaking, is decisive for the application of Article 95. Any other view would entail a comparison of undertakings of such a nature as to frustrate the prohibition on tax discrimination contained in Article 95. Article 95 is intended to guarantee the complete neutrality as regards competition of the taxes borne by products which form the subject-matter of intra-Community trade; competition is measured exclusively according to economic factors which in their turn determine the market. Accordingly only the economic unit which benefits from tax advantages can constitute the criterion.

   It is this economic unit which operates on the market in spirits and whicn plays a part in determining competition: the spirits are supplied for marketing by the cooperative fruit distillery as such and not by its members. The legal form (cooperative or association) which underlies that economic unit is irrelevant within the framework of Article 95. In fact cooperative fruit distilleries are large distilleries.

2. The same considerations apply to distilleries for which production is estimated at a standard level, which, by reason of their own distilling rights and of the rights of the owners of raw materials who are associated with them, also constitute large economic units.

3. The decisive factor is that the cooperative fruit distilleries and distilleries for which production is estimated at a standard level are able themselves to market the spirits which they produce under preferential tax arrangements through other large distilleries. The products of such large distilleries enter into competition on the market with imported products; the substantial tax advantages for which they qualify confer upon domestic spirits a great price advantage in relation to imported spirits. This constitutes discrimination for the purposes of Article 95 of the Treaty as it has been interpreted in the case-law of the Court of Justice.

   The Hauptzollamt Flensburg, the defendant in the main action, observes that the Court has recognized, in its judgment in the Schneider-Import case, that the tax advantages enjoyed by distilleries for which production is estimated at a standard level for tax purposes, owners of raw materials used for distilling and small bonded distilleries are lawful under Article 95 of the Treaty; to that extent the question whether the sole determining factor is the similarity of the goods should be answered in the negative. The same applies in the case of the cooperative form of small-scale production in cooperative fruit distilleries.

   The main action differs from the Schneider case principally inasmuch as in 1973 the Federal Law on the Monopoly in Spirits did not make express provision for a reduction in tax in the case of imported spirits coming from distilleries similar to the national distilleries which qualified for that reduction. Nevertheless it does not follow from the foregoing that all imported spirits, regardless of their origin, qualify for domestic tax advantages. Only foreign producers who correspond to the national categories obtaining preferential treatment may claim the same tax advantages under Article 95; any other interpretation would lead to discrimination against 95 % of the domestic production of spirits which is liable to taxes up to and exceeding DM 1 500 and would be entirely unrelated to the attainment of Community objectives prescribed by the Treaty.

   The rum distilleries in Guadeloupe are not comparable, even approximately, to the small distilleries or national cooperatives.

   The concept of “conditions of production” is extremely vague; neither the level of wages and prices, nor the social environment, nor the climate or the quality of the soil constitute tax criteria under the national law in force at the material time.

The Government of the Federal Republic of Germany refers to the observations which it submitted in Case 26/80 (Schneider-Import) and which in this case relate essentially to the following points:

1. According to the case-law of the Court of Justice there is no breach of Article 95 of the EEC Treaty if a Member State applies to a specific product on the national territory graduated rates of tax and does not grant similar imported products a reduced rate of tax unless they fulfil the same conditions as those prescribed for domestic products in order to qualify for the correspondingly reduced rate of tax.

2. The extension to all imported spirits of the lowest rate of tax in the Federal Republic far exceeds the content of the prohibition against discrimination in tax matters laid down in Article 95 of the EEC Treaty.

3. The case-law of the Court shows that at the present stage of its development Community law does not prohibit Member States from granting tax advantages to certain types of spirits or to certain classes of producers since tax advantages of that kind may serve legitimate social or economic purposes; in stating that such preferential systems must be extended without discrimination to spirits coming from other Member States the Court refers, with regard to the treatment of imported spirits, not only to the amount entailed under such preferential systems but also to the conditions to which they are subject. Imported products cannot in principle qualify for the tax advantage prescribed by the national system unless they satisfy the same conditions as competing domestic products. According to the Court, Article 95 requires that tax advantages granted in respect of domestic products be extended without discrimination to spirits coming from other States. In a situation in which a Member State lawfully applies different rates of tax to similar products the application of the lowest rate of tax to all similar imported products alone necessarily results in discrimination at the expense of products which do not qualify for that advantage under national law and which are nevertheless in competition with the imported products in a similar fashion to the products qualifying for the advantage in question.

4. The question whether indirect discrimination may arise from the fact that the importation at the reduced rate of tax is linked exclusively to an annual production limit, whilst, with regard to domestic products, Article 79 (2) of the Law prescribes a number of other conditions which may be laid for the grant of the fiscal advantage and which foreign producers cannot normally fulfil falls within the exclusive jurisdiction of the court dealing with the main action.

   In any case the German system corresponds to the requirement which follows from the case-law of the Court of Justice that the criteria to which the tax advantage is subject under national law must not be designed in such a way that they may be satisfied without difficulty by domestic producers but not by foreign producers.

5. Distilleries whose production is estimated at a standard level constitute a means for facilitating the collection of revenue and social considerations and considerations of agricultural policy are also involved.

   The system of distilleries whose production is estimated at a standard level makes it possible to tax small distilleries without unreasonable administrative costs; at the same time, the fact that the assessment procedure permits a tax-free production surplus promotes honesty in taxation matters and curbs the temptation of clandestine distilling. Any reduction in tax for such distilleries is essentially a side-effect of the only practicable arrangements for the collection of taxes on a national scale from very small distilleries. As a technical rule for the collection of taxes the system of such distilleries does not fall within the prohibition on tax discrimination contained in Article 95 of the Treaty; from the point of view of tax procedures it forms the most suitable means of collecting taxes and any subsidiary advantages which it may bring have positive effects as regards social and agricultural policy.

6. The system whereby distilleries are assessed over a fixed period does not come within the scope of Article 95: it does not constitute a tax advantage. The mere procedure whereby it is possible to distil on favourable tax conditions a larger quantity of spirits in certain years, that quantity being reduced by as much in other years, does not constitute an advantage in view of the balance which is achieved within the period; the fact that this advantage is not extended to foreign products does not fall within the prohibition on tax discrimination laid down in Article 95. In any case the system in question is compatible with the principles laid down by Article 95: an extension to foreign producers of spirits of the right to distil a certain quantity over a fixed period would not mean equality of treatment in tax matters but rather the granting of a considerable advantage in favour of imported spirits.

   The Commission states that the Finanzgericht Hamburg is requesting the Court to clarify the question whether, and under what conditions, imported spirits may qualify for tax advantages which under national law are reserved to certain types of products or to certain categories of producers; it is thus necessary to determine the criteria for the application of Article 95 of the Treaty. Since the Court has already delivered a number of rulings on this problem the question of the Finanzgericht is thus also intended to obtain clarification of the scope of such rulings.

The question whether the decisive factor in the interpretation of Article 95 is the similarity of imported products and domestic products (first paragraph of Article 95) or the existence of a competitive relationship between the products (second paragraph of Article 95) or the fact that imported products and domestic products are subject to similar conditions of production

1. The judgments of the Court of 27 February 1980 (Commission v French Republic, Case 168/78, Commission v Italian Republic, Case 169/78 and Commission v Kingdom of Denmark, Case 171/78, [1980] ECR 347, 385 and 447 respectively) indicate that Article 95, which supplements the provisions on the abolition of customs duties and charges having equivalent effect, has as its aim to ensure the free movement of goods between Member States in normal conditions of competition by the elimination of all forms of protection which may result from the application of internal taxation which discriminates against products from other Member States; Article 95 is intended to guarantee the complete neutrality of national taxation as regards competition between domestic products and imported products.

   According to the case-law in general of the Court, and more particularly the judgments of 17 February 1976, Rewe, Case 45/75, [1976] ECR 181 and of 10 October 1978, Hansen & Balle, Case 148/77, [1978] ECR 1787, products must be regarded as similar where, from the point of view of consumers, they have similar characteristics or meet the same needs; the scope of the first paragraph of Article 95 is therefore to be determined not on the basis of the criterion of the strictly identical nature of the products but on that of their identical or comparable use. Reasonable flexibility is therefore needed for the interpretation of the concept of “similar products”, the first paragraph of Article 95 should make it possible to cover all taxation procedures which conflict with the principle of the equality of treatment of domestic products and imported products.

   The function of the second paragraph of Article 95 is to cover all forms of indirect tax protection in the case of products which, without being similar, are nevertheless in competition, even partial, indirect or potential, with certain products of the importing country.

2. The Court has also ruled that the advantages which national tax legislation confers, in the form of tax exemptions or reduced rates of taxation, on the production of certain types of spirits or on certain classes of producers must be extended to imported Community spirits“which fulfil the same conditions, taking into account the criteria which underlie the first and second paragraphs of Article 95”. These “conditions” must be distinguished from the “similar conditions of production” as understood by the court making the reference, which include “the most diverse circumstances” such as the level of wages and prices, the social environment or, in the case of agricultural products, climate and the quality of the soil. The case-law of the Court of Justice does not provide any grounds for considering that the application of the prohibition on tax discrimination contained in Article 95 may depend upon the existence of such an implied additional criterion. The Court has always upheld a strict interpretation of Article 95; if the application of the principle of nondiscrimination in tax matters were to be made conditional on imported products and similar domestic products being in additional produced under similar conditions this would amount to depriving Article 95, by means of interpretation, of all practical effect.

The question whether the extension to imported goods of a tax advantage for domestic goods may be made dependent upon the volume of production of each manufacturing concern as a legal or economic unit

1. The case-law of the Court of Justice recognizes that the Member States may, where no Community arrangements exist, choose for national production the tax system which appears to them the most appropriate; such a system may, within the framework of the economic policy followed by the Member State in question, accord tax advantages to certain types of products or to certain categories of producers. Nevertheless it is not compatible with Article 95 unless the advantages extend, or may be extended, without discrimination, to similar products from other Member States.

2. Such an extension to imported products of tax advantages granted at national level on very precise conditions give rise to difficulties; these difficulties are due to the fact that that “extension” ultimately signifies that a domestic tax system is “exported”, inasmuch as it is applied to a factual situation in a foreign country for which it was not originally designed. The Court itself has recognized the existence of these troublesome problems of assimilation and comparison. The essential point is, however, that the extension of tax advantages to imported products must be effected without discrimination; differences in taxation of a discriminatory or protectionist nature cannot be justified.

3. The need to effect such an extension without discrimination constitutes a limit to the freedom of action of Member States. That limit is attained, or indeed exceeded, if the national tax system cannot be transposed to imported products. Specific instances of this occur where technical barriers which originate in the structure of national law, prevent such an extension (for example, “distillation over a period”) or if the national tax system links the grant of tax advantages to characteristics and procedures which are peculiar to the national legal system but unknown in the exporting State. In such conditions the tax advantage granted at national level is not “exportable” for substantive or legal reasons; it therefore constitutes discrimination against imported products and comes under Article 95.

The replies to be given to the questions submitted

The Commission suggests that the replies to the questions submitted by the Finanzgericht Hamburg should be as follows :

1. The decisive criterion for the application of Article 95 is whether the products in question are “similar” (first paragraph) or whether the taxation is of such a kind as to afford indirect protection to other products (second paragraph). If these material conditions are fulfilled it is of little relevance that the imported products and domestic products are subject to similar conditions of production.

2. At the present stage of Community law the Member States remain free to grant tax advantages to certain national producers or to certain products on condition that such advantages may be extended to imported products without any discrimination against them or any indirect protection of domestic products.

3. The limit thus drawn to the freedom of action of the Member States would in particular be exceeded, and Article 95 infringed, if technical barriers were to prevent any extension or if the tax advantages granted at national level were to be linked to special features of national law unknown to the law of the exporting State.