Court of Justice of the European Communities (including Court of First Instance Decisions)

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Tax provisions - Internal taxation - System of differentiated taxation of spirits - Similar or competing products - Criteria for assessment - Irrelevance of consumer habits - Category most heavily taxed covering almost exclusively imported products - Not permissible
(EEC Treaty, Art. 95)

A Member State is in breach of its obligations under Article 95 of the EEC Treaty if, in connection with value added tax, it applies to spirits a system of differentiated rates arranged so that all products produced domestically fall within the most favourable tax category, whereas imported products, in respect of which there is no national production, fall, with a few exceptions, under the most heavily taxed category.
With regard to Article 95, there is either a similarity between, or sufficiently marked characteristics common to, spirits such as to enable it to be said that they are at least partly or potentially in competition.
As far as the possible degree of substitution between beverages is concerned, it is immaterial that those benefiting from the favourable rate are regarded as traditional national drinks and consumed extensively in the country concerned, whereas those taxed more heavily are regarded by the consumer as luxury products. For the purpose of measuring the possible degree of substitution it is impossible to restrict oneself to consumer habits in a Member State or in a given region. Those habits, which are essentially variable in time and space, cannot be considered to be immutable; the tax policy of a Member State must not therefore serve to crystallize given consumer habits with a view to consolidating an advantage acquired by national industries concerned to comply with them.

In Case C-230/89,
Commission of the European Communities, represented by Dimitrios Gouloussis, Legal Adviser, acting as Agent, with an address for service in Luxembourg at the office of Guido Berardis, a member of the Commission' s Legal Service, Wagner Centre, Kirchberg,
applicant,
v
Hellenic Republic, represented by Nana Dafniou, a lawyer in the Special Community Litigation Department of the Ministry of Foreign Affairs, acting as Agent, with an address for service in Luxembourg at the Greek Embassy, 117 Val Sainte-Croix,
defendant,
APPLICATION for a declaration that by applying to spirits a system of differentiated value added tax rates discriminating against imported beverages which Greece does not produce the Hellenic Republic has failed to fulfil its obligations under Article 95 of the EEC Treaty,
THE COURT,
composed of O. Due, President, G. C. Rodríguez Iglesias and M. Díez de Velasco (Presidents of Chambers), Sir Gordon Slynn, C. N. Kakouris, R. Joliet, F. Grévisse, M. Zuleeg and P. J. G. Kapteyn, Judges,
Advocate General: F. G. Jacobs,
Registrar: D. Louterman, Principal Administrator,
having regard to the Report for the Hearing,
after hearing oral argument from the parties at the hearing on 22 January 1991, at which the Hellenic Republic was represented by K. Samoni-Rantou, acting as Agent,
after hearing the Opinion of the Advocate General at the sitting on 21 February 1991,
gives the following
Judgment

1 By application lodged at the Court Registry on 19 July 1989, the Commission of the European Communities brought an action under Article 169 of the EEC Treaty for a declaration that, by applying to spirits a system of differentiated value added tax rates discriminating against imported beverages which Greece does not produce, the Hellenic Republic has failed to fulfil its obligations under Article 95 of the EEC Treaty.
2 Article 1(1) of Law No 1676 of 1986 (FEK No 125/A of 29 December 1986), which supplements and amends Law No 1642 of 1986 (FEK No 204/A of 21 August 1986) by which the Hellenic Republic introduced a value added tax system, provides that the rate applicable to the supply of goods and services and the importation of goods is to be 18%. That rate was reduced to 16% by Article 4 of Administrative Circular No R 8499/4941 of 28 December 1987. Article 1(2) of Law No 1676 lays down an increased rate of 36% for the goods and services listed in Annex III of Law No 1642.
3 Amongst the products listed in that annex are certain spirits, namely whisky, gin, vodka, rum, tequila, arak and tafia, which, according to the Commission, Greece does not produce, whereas spirits that for the most part are produced in Greece, such as ouzo, brandy and liqueurs, are subject to the general rate of 16%.
4 Reference is made to the Report for the Hearing for a fuller account of the national legislation at issue, the procedure and the written observations submitted to the Court, which are mentioned or discussed hereinafter only in so far as is necessary for the reasoning of the Court.
5 The Commission claims that all spirits should be regarded as similar products within the meaning of the first paragraph of Article 95, or at least as being partly or potentially in competition, within the meaning of the second paragraph of Article 95. An increased rate of VAT which, given the lack of national production with regard to the beverages to which it applies, in fact affects only imported products cannot be regarded as compatible with the prohibition of discrimination set out in that provision.
6 The Hellenic Republic maintains that the VAT rates applicable to spirits were fixed on the basis of objective criteria such as the habits of consumers and the particular characteristics of the beverages, no distinction being made between national products and imported products. In the view of the Hellenic Republic, spirits cannot all be regarded as similar. Thus ouzo is the traditional drink of Greece, very extensively drunk by the people of Greece, whereas whisky is considered by the consumer to be a luxury product, and it is therefore logical that someone who can afford such a beverage should have to pay a higher rate of tax. Moreover, amongst the beverages taxed at the most favourable rate there are imported beverages such as brandy and certain liqueurs which are consumed in large quantities by Greeks.
7 Article 95 prohibits the imposition on the products of other Member States of any internal taxation in excess of that imposed on similar domestic products or internal taxation of such a nature as to afford indirect protection to other products.
8 As the Court has already held (judgments in Case 168/78 Commission v France [1980] ECR 347, Case 169/78 Commission v Italy [1980] ECR 385, Case 171/78 Commission v Denmark [1980] ECR 447 and Case 319/81 Commission v Italy [1983] ECR 601), amongst all spirits there is an indeterminate number of beverages which must be regarded as similar products within the meaning of the first paragraph of Article 95 and even where it is impossible to perceive a sufficient degree of similarity between the products concerned, there are nevertheless characteristics common to all those spirits which are sufficiently marked for it to be said that they are at least partly or potentially in competition.
9 The fact that ouzo is regarded as a traditional Greek drink and is drunk extensively by the people of Greece, whereas whisky is regarded by the consumer as a luxury product, is immaterial in this connection. The Court has stated, inter alia in its judgment in Case 170/78 Commission v United Kingdom [1980] ECR 417, that for the purpose of measuring the possible degree of substitution between beverages, it is impossible to restrict oneself to consumer habits in a Member State or in a given region. In fact, those habits, which are essentially variable in time and space, cannot be considered to be immutable; the tax policy of a Member State must not therefore serve to crystallize given consumer habits with a view to consolidating an advantage acquired by national industries concerned to comply with them.
10 The tax system established by the Greek legislation displays undeniably discriminatory or protective features. Although it does not establish any formal distinction according to the origin of products, it is arranged in such a way that all the national production of spirits falls within the most favourable tax category. Those features of the system cannot be cancelled out by the fact that a fraction of imported spirits benefits from the most favourable rate (see the judgment in Case C-171/78 Commission v Denmark cited above). It therefore appears that that tax system benefits national production and puts imported spirits at a disadvantage.
11 The Hellenic Republic also relies upon the fact that ouzo is manufactured principally by small-scale undertakings which would not be able to support an increased tax burden. According to the Hellenic Republic, the Court has accepted that taxation may be differentiated on the grounds of protecting small undertakings which manufacture small quantities or for the purposes of protecting products which are traditional in character or of commonly acknowledged quality.
12 Although it is true that the Court has acknowledged that, at the present stage of its development and in the absence of any unification or harmonization of the relevant provisions, Community law does not prohibit Member States from granting tax advantages to certain types of spirits or to certain classes of producers and that tax advantages of that kind may serve legitimate economic or social purposes (judgment in Case 148/77 Hansen v Hauptzollamt Flensburg [1978] ECR 1787), that is subject to the condition that the Member States using that power extend the benefit thereof in a non-discriminatory and non-protective manner to imported products in the same situation (judgment in Case 168/78 Commission v France, cited above). At all events that condition is not satisfied in this case.
13 At the hearing the Hellenic Republic claimed in addition that Greece did produce beverages included in the most heavily-taxed category. The Commission disputed the accuracy of that contention.
14 That submission for the defence was made for the first time at the hearing. Accordingly it is inadmissible.
15 Moreover, even if there was limited national production of beverages belonging to the most-heavily taxed category, that fact is not such as to exclude the discriminatory and protective features of the system at issue.
16 It follows from the foregoing that the declaration sought by the Commission must be granted.

17 Costs
Under Article 69(2) of the Rules of Procedure, the unsuccessful party is to be ordered to pay the costs. Since the Hellenic Republic has failed in its submissions, it must be ordered to pay the costs.

On those grounds,
THE COURT
hereby:
1. Declares that, by applying to spirits a system of differentiated VAT rates discriminating against imported beverages which Greece does not produce, the Hellenic Republic has failed to fulfil its obligations under Article 95 of the EEC Treaty;
2. Orders the Hellenic Republic to pay the costs.