On May 23, 2019 on the website of the Court of Justice of the European Union (CJEU) the opinion of Advocate General Sharpston in the Case C-270/18, UPM France versus Premier ministre, Ministre de l’Action et des Comptes publics (ECLI:EU:C:2019:442), was published.

Council Directive 2003/96/EC of 27 October 2003 restructuring the [EU] framework for the taxation of energy products and electricity (Directive 2003/96, or ‘the Directive’) afforded France a special transitional period to make the necessary adjustments to existing arrangements. This reference for a preliminary ruling enquires as to the respective rights and obligations of taxable entities and of the Member State during that period.

Specifically, UPM France claims, on the basis of Article 14(1)(a) of Directive 2003/96, that it is entitled to reimbursement of tax paid on its consumption of natural gas in an installation for the combined generation of heat and electricity, where the electricity thereby produced was consumed for its own use in a further manufacturing process. UPM France has been unsuccessful thus far before the national courts. The Conseil d’État (Council of State, France; ‘the referring court’), as the final court of appeal, has now requested the Court’s assistance in interpreting Articles 14(1)(a) and 21(5), third subparagraph, of Directive 2003/96.

 

Facts, procedure and the questions referred

·   For the purpose of its paper-making business, UPM France operates an installation for the combined generation of heat and electricity using natural gas as a fuel. The electricity thereby produced is in turn used in a further process producing heat.

 

·   The gas supplied to UPM France during the relevant period (from 2004 to 2006) was subject to the TICGN, as provided for in Article 266 quinquies of the French Customs Code.

 

·   It appears from the order for reference that UPM France’s installation had commenced operation too early to qualify for the 5-year exemption in Article 266 quinquies A, but that it would otherwise have qualified for that exemption. Because that 5-year period, calculated from when the installation become operable, had expired, UPM France was unable to renounce its (putative) entitlement to exemption under Article 266 quinquies A. It could not, therefore, obtain the benefit of the continuing exemption provided for by Article 266 quinquies C.

 

·   UPM France considered, on the basis of Article 14(1)(a) of Directive 2003/96, that it should have been granted exemption from TICGN for the proportion of its gas consumption that was used to produce electricity used in its own subsequent production processes. Accordingly, it brought a claim before the tribunal administratif de Cergy-Pontoise (Administrative Court, Cergy-Pontoise, France), seeking repayment of the sum of EUR 2 962 224.08, together with statutory interest and compound interest thereon, as partial reimbursement of the TICGN paid during the period from 1 January 2004 to 31 March 2008, and also as compensation for the damage that UPM France considered that it had suffered as a result of the French Republic’s delay in transposing Directive 2003/96.

 

·   By judgment of 17 July 2013, the tribunal administratif de Cergy-Pontoise (Administrative Court, Cergy-Pontoise) held that there was no need to adjudicate, as regards the sum of EUR 137 931, for the period from 1 January 2007 to 31 March 2008. The court rejected the remainder of UPM’s claim for the period 1 January 2004 to 31 December 2006. That period is the period at issue during the subsequent proceedings which led to the present reference.

 

·   By judgment of 15 March 2016, the cour administrative d’appel de Versailles (Administrative Court of Appeal, Versailles, France) dismissed the appeal brought by UPM France against that judgment on the grounds that the TICGN could not be portioned out depending on whether the gas in question had been used to produce electricity or heat; and that any exemption would be regulated only by Article 15 of Directive 2003/96.

 

·   UPM France further appealed to the referring court on 17 May 2016. It requested that court to set aside the judgment of the cour administrative d’appel de Versailles (Administrative Court of Appeal, Versailles), and to hold the State additionally liable in the amount of EUR 5 000 pursuant to Article L-761-1 of the Administrative Justice Code, which concerns the allocation of costs.

 

·   UPM France further requested, in the alternative, that the court should make a reference for preliminary ruling to this Court, or (as a further alternative) that the appeal should be joined with a preceding appeal pending before the referring court, in which a reference had been made (‘Cristal Union’), so as to submit additional questions to the Court and to make it possible for UPM France to submit observations.

 

·   On 7 March 2018, the Court gave judgment in Cristal Union. It held that ‘the compulsory exemption provided for in that provision [Article 14(1)(a) of Directive 2003/96] applies to energy products used for electricity generation, when such products are used for the combined generation of electricity and heat within the meaning of Article 15(1)(c) of that directive’.

 

·   Notwithstanding that judgment, the referring court was of the view that questions still remained concerning the correct interpretation of Directive 2003/96. It considered that the cour administrative d’appel de Versailles (Administrative Court of Appeal, Versailles) had erred in law by holding that taxation of the natural gas which UPM France used for the combined production of heat and electricity was covered exclusively by Article 15 of Directive 2003/96. The referring court therefore stayed proceedings and referred the following questions:

‘(1) Must Article 21(5), third subparagraph, of Directive 2003/96 be interpreted as meaning that the tax exemption which that provision allows Member States to grant to small producers of electricity, provided that they tax the energy products used for the production of that electricity, may apply in circumstances such as those described in paragraph 7 of the present decision for the period prior to 1 January 2011 during which France, as was permitted by the Directive, had not yet introduced the domestic tax on final consumption of electricity or, accordingly, the exemption of small producers from that tax?

(2)  If the answer to the first question is in the affirmative, how must Article 14(1)(a) and Article 21(5), third subparagraph, of Directive 2003/96 be combined as regards small producers which consume the electricity that they produce for the purposes of their business? Specifically, do those articles require that there be a minimum level of taxation resulting from either (i) the electricity produced being taxed and the natural gas used being exempted from tax, or (ii) the production of electricity being exempt from tax and the State then being required to tax the natural gas used?’

 

·   UPM France, the French Republic, the Kingdom of Spain and the European Commission submitted written observations and presented oral argument at the hearing on 14 March 2019.

 

Conclusion

The Advocate General proposes that the Court should give the following answer to the questions referred for a preliminary ruling by the Conseil d’État (Council of State, France):

(1)  Article 21(5), third subparagraph, of Council Directive 2003/96/EC of 27 October 2003 restructuring the [EU] framework for the taxation of energy products and electricity, as a derogation from the mandatory exemption in Article 14(1)(a), first sentence, must be given a restrictive interpretation. Accordingly, it may be relied upon only where electricity is subject to general taxation, in accordance with Council Directive 92/12/EEC of 25 February 1992 on the general arrangements for products subject to excise duty and on the holding, movement and monitoring of such products, and where an exemption for production for own use by small producers has been established in national law that is in conformity with Article 21(5), third subparagraph, of Directive 2003/96.

(2)  Article 21(5), third subparagraph, of Directive 2003/96, as a derogation from the mandatory exemption from taxation in Article 14(1)(a), first sentence, is independent of the environmental derogation from that exemption provided for by Article 14(1)(a), second and third sentences. Whilst taxes applied to small producers under Article 21(5), third subparagraph, are subject to the minimum levels of taxation in Directive 2003/96, taxes applied under the environmental derogation in Article 14(1)(a) are not subject to those minimum levels of taxation.

 

From the assessment as made by the Advocate General

 

Admissibility

·   The French Government submits that the questions referred are inadmissible. Article 18(10), second subparagraph, of Directive 2003/96 provides that during the relevant period, from 2004 to 2006 (and indeed until 1 January 2009), France benefited from a transitional period to adjust existing legislation. As the Court explained in Messer France, ‘until 1 January 2009, compliance with the minimum rates of taxation laid down in that directive was, in the context of rules on the taxation of electricity laid down by EU law, the only obligation incumbent on the French Republic’.

 

·   I have some sympathy for the position taken by the French Government. However, I note that the issue of admissibility was not addressed in either of the preceding judgments (Messer France and Cristal Union), which were given in reply to questions submitted by the same referring court concerning Directive 2003/96.

 

·   Furthermore, it follows from the established case-law of the Court that it is for the national judge to decide on the relevance of a reference, and that the Court should only refuse to answer questions that are obviously irrelevant to the national case. 

 

·   I will therefore first consider whether during the transitional period there were obligations upon France, stemming from the Directive, which could provide a sufficient basis to justify submission of the questions referred. 

 

Transitional period

·   The implementation period for the Directive laid down by Article 28(1) expired on 31 December 2003. Until that date, the Member States were merely required ‘to refrain, during the period laid down therein for its implementation, from adopting measures liable seriously to compromise the result prescribed’. 

 

·   The fact that France failed fully to implement the Directive by the end of the specific transitional period that it had been granted by Article 18(10) of the Directive (which expired on 1 January 2009 and thus subsequent to the relevant period in the present case) is likewise irrelevant.

 

·   It may be argued that the obligations on a Member State during a transitional period should be the same as during an implementation period; and that accordingly France was required to refrain from adopting measures liable seriously to compromise the result prescribed. 

 

·   However, the issue at stake here is not whether France during the transitional period had adopted measures that could compromise the subsequent full implementation of the Directive. It is whether France during that period had failed to observe obligations imposed upon it by the Directive.

 

·   At the hearing, the Commission submitted that although Article 18(10), second subparagraph, of Directive 2003/96 provided France with a special transitional period, that did not exempt France from respecting the structural balance of Directive 2003/96, which requires that the production of electricity must be taxed either at the level of inputs or at the level of outputs. France was thus required to respect certain provisions of the Directive so as to ensure, on the one hand, that the minimum rates of taxation were achieved; and, on the other hand, that the prohibition on taxation of energy products in Article 14(1)(a) was observed.

 

·   The Commission argued that that approach was confirmed by Cristal Union, in which the Court had provided an interpretation of Articles 14 and 15 of the Directive for the period that was otherwise covered by the transitional arrangement for France. In this connection, I note that the Court established in Flughafen Köln/Bonn that Article 14(1)(a) ‘has direct effect in the sense that it may be relied upon by an individual before national courts’.

 

·   However, in my opinion the Commission’s approach is not borne out by the text of the Directive.

 

·   It is true that in many respects a comprehensive system of taxation that must be applied either to inputs or outputs would constitute a logical approach to the taxation of energy products and electricity. However, the Commission has failed to identify any substantive provision in the Directive that lays down that approach as an overriding principle.

 

·   Accordingly, additional obligations incumbent on the Member States even during an implementation period or a transitional period cannot in my opinion be deduced from the structural balance of the Directive.

 

·   Rather, I note that although Directive 2003/96 concerns the taxation of both energy products and electricity, the wording of Article 18(10), second subparagraph, is limited to providing a transitional period where France may maintain its ‘current electricity taxation system’. At the hearing, the French Government argued that the reference to a ‘system’ must read as comprising both taxation of the electricity produced (outputs) and taxation of energy products and electricity used for the production of electricity (inputs).

 

·   Despite that reference to a ‘system’, however, Article 18(10), second subparagraph, also specifically states that during the transitional period ‘the global average level of the current local electricity taxation is to be taken into account to assess whether the minimum rates set out in this Directive are respected’ (emphasis added). The referring court has explained that during the period in question, local electricity taxation only applied to electricity as an output in the form of delivery to final consumers. Electricity produced for own use was exempted from such taxation.

 

·   Accordingly, it seems clear that Article 18(10), second subparagraph, should be read as referring only to the taxation of electricity as an output, and not to taxation of energy products and electricity used as inputs. The preparatory works for Directive 2003/96 likewise provide no basis for France’s argument that the scope of Article 18(10), second subparagraph, comprise both input and output taxation.

 

·   In such circumstances, the Court should apply its well- established principle of interpretation, whereby any provision that ‘lays down an exception to the general rule must be interpreted restrictively’. 

 

·   Directive 2003/96 has several layers. Article 1 prescribes taxation of both energy products and electricity. Article 14(1)(a) then provides a ‘mandatory exemption’ from such taxation for energy products and electricity that are used as inputs for the production of electricity. 

 

·   Article 14(1)(a) itself and Article 21(5), third subparagraph, then contain further optional derogations from that mandatory exemption. These are the subject of the questions referred.

 

·   It seems to me that in this multi-layered arrangement, the mandatory exemption in Article 14(1)(a) must (in its capacity as an exemption) be given a restrictive interpretation. At the same time, however, it must be regarded as the general rule in relation to the further provisions providing for the possibility of derogating from that mandatory exemption. Applying that logic, the transition arrangement in Article 18(10), second subparagraph, must in principle be regarded as an exception to the main rules of the Directive (those main rules thus including both Article 1 and the mandatory exemption in Article 14(1)(a)). It must therefore be given a restrictive interpretation.

 

·   Against that background, I observe that Article 18(10), second subparagraph, provides for a transitional period for France during which there is an exemption for the existing electricity tax, and furthermore that explicit reference is made to the local electricity tax in that Member State which, during the period in question, was an output tax. It follows that Article 18(10) did not provide any exemption, during the transitional period, from the prohibition in Article 14(1)(a) on input tax on energy products and electricity used to produce electricity.

 

·   Therefore, the transitional period provided for in Article 18(10), second subparagraph, does not operate so as to protect an input tax on energy products, such as the TICGN in the present case.

 

·   That reading accords with the Court’s judgment in Messer France, which held that compliance with the minimum rates of taxation laid down in Directive 2003/96 ‘was, in the context of rules on the taxation of electricity laid down by EU law, the only obligation incumbent on the French Republic’. 

 

·   It may be suggested that it would be inconsistent for France to be granted a transitional period in relation to the taxation of electricity as an output, but not in relation to the taxation of energy products and electricity as inputs for the production of electricity.

 

·   However, where application of a restrictive interpretation may appear to make a transitional arrangement less than perfect, the risk of such a result must in my opinion remain with the party that was to benefit from the transitional arrangement. That must especially be the case where the restrictive interpretation serves to promote fundamental principles of EU law.

 

·   The aim of Directive 2003/96, as stated in its second recital, is to support the ‘proper functioning of the internal market’. That objective would not be served if one Member State were to be permitted to tax energy products and electricity used for the production of electricity whilst other Member States were subject to a prohibition on such taxation. Accordingly, any exemption from that prohibition would need to be explicitly stated in the transitional arrangement.

 

·   In KappAhl, the Court examined a transitional accession scheme for Finland in relation to customs duties to be applied to third country products, which allowed Finland to impose higher customs rates than those contained in the EU Customs Code. The Finnish Government argued that it must therefore similarly be able to apply the difference in customs rates to third country products when these were imported to Finland via other EU Member States — otherwise, the transition scheme could openly be circumvented.

 

·   However, the text of the transition scheme there at issue did not indicate that it could be applied to trade between the Member States. The Court held that ‘given the importance of the principle of free movement of goods between Member States, a derogation, even if temporary, must be granted clearly and unambiguously’. 

 

·   Here, the derogation contained in the transitional arrangement under Article 18(10), second subparagraph, only contains a ‘clear and unambiguous’ reference to ‘electricity taxation’. It makes no reference to the use of energy products and electricity for the production of electricity.

 

·   On that basis, I consider that during the transitional period provided for by Article 18(10), second subparagraph, France remained bound by the provisions of Directive 2003/96 that concern the taxation of energy products and electricity used for the production of electricity. Accordingly, the questions referred (which concern the interpretation of Articles 14(1)(a) and 21(5), third subparagraph) require to be answered.

 

Question 1

·   By its first question, the referring court essentially asks whether Article 21(5), third subparagraph, of Directive 2003/96 applies during the transitional period provided for by Article 18(10), second subparagraph, so as to allow France — notwithstanding the mandatory exemption in Article 14(1)(a) — to tax the energy products used by small producers to produce electricity, in circumstances in which those producers are not subject to taxation on the electricity that they produce.

 

·   It is clear from the legislative background that, during the period from 2004 to 2006, entities producing electricity for their own use were required to pay the CSPE as a fiscal contribution to the public electricity service. The local tax on electricity applied only to the delivery of electricity to final consumers, and not to the production of electricity for own use. 

 

·   It is also clear that a national tax on electricity was introduced in France only with effect from 1 January 2011 — that is, two years after the end of the transitional period in Article 18(10), second subparagraph. 

 

·   The question may therefore be reframed as follows: given that (i) no national tax on electricity existed during the period in question; (ii) the CSPE appears to have been regarded as a fiscal contribution rather than a tax; and (iii) local taxes on electricity did not apply to production of electricity for own use, are those facts taken together sufficient to fulfil the requirements of Article 21(5), third subparagraph, of the Directive, thus permitting France to tax energy products used for the production of electricity for own use by small producers?

 

·   In my opinion, the answer is no.

 

·   For the reasons that I have given, the mandatory prohibition on taxation of energy products and electricity used as inputs for the production of electricity in Article 14(1)(a) must be regarded as one of the general rules of the Directive. Accordingly, the optional derogation from that mandatory exemption contained in Article 21(5), third subparagraph, must be given a restrictive interpretation.

 

·   Thus, Article 21(5), third subparagraph, can be applied only where national law provides for such an exemption from taxation of the electricity output for own use by small producers. In the present case, however, no such exemption was granted for small producers between 2004 and 2006. Rather, all producers were required to pay a fiscal contribution to the public electricity service; and all producers were exempt from payment of local taxes on electricity that they produced for their own use.

 

·   In this connection, it is irrelevant whether the fiscal contribution to the public electricity service would in itself fall to be classified as a tax under Directive 92/12, which forms the basis for the classification of taxes under Directive 2003/96, as explained in recital 33 of the latter. The fact remains that the French Government had made no provision prior to 1 January 2011 for electricity production for own use by small producers to enjoy an exemption. Accordingly, prior to that date, Article 21(5), third subparagraph, could not be applied.

 

·   Furthermore, a derogation from a mandatory exemption in the Directive may only be applied where it has duly been implemented. Article 21 was not implemented in France prior to 2011. It follows that for this supplementary reason the derogation in Article 21 could not be relied upon during the preceding period.

 

·   In similar vein, in Flughafen Köln/Bonn the Court pointed out that Article 14(1)(a), second and third sentences, ‘is merely a potential limitation to the exemption rule, and a Member State which has not exercised that option cannot rely on its own failure to do so in order to refuse a taxpayer the benefit of an exemption which he may legitimately claimunder Directive 2003/96’. 

 

·   I therefore propose that the answer to the first question should be that Article 21(5), third subparagraph, of Directive 2003/96, as a derogation from the mandatory exemption in Article 14(1)(a), must be given a restrictive interpretation. Accordingly, it may be relied upon only where electricity is subject to general taxation, in accordance with Directive 92/12, and where an exemption for production for own use by small producers has been established in national law that is in conformity with Article 21(5), third subparagraph, of Directive 2003/96.

 

·   As a final comment, I observe that the French Customs Code during the period concerned appears to have offered certain mechanisms for exempting producers from payment of the TICGN. Whether those exemptions would be sufficient to fulfil the requirements of the prohibition in Article 14(1)(a) would be a matter for the national court to decide. However, I note that the exemptions in the French Customs Code appear to be subject to time limitations that are not present in Article 14(1)(a) of the Directive.

 

Question 2

·   By its second question, the referring court essentially asks how Articles 14(1)(a) and 21(5), third subparagraph, of Directive 2003/96 are to be interpreted so as to avoid a conflict of norms between those provisions as they apply to small producers that consume the electricity that they produce.

 

·   In reality, Article 14(1)(a) encompasses two separate provisions. The first sentence lays down one of the general (mandatory) rules of Directive 2003/96: when energy products and electricity serve as inputs for the production of electricity, they should not be taxed.

 

·   The second and third sentences contain an entirely different provision. Taken together, they provide for a derogation on environmental grounds from that mandatory exemption from taxation for energy products used as inputs. If use is made of that derogation to tax input energy products, the resulting taxation is not subject to or counted towards the minimum levels of taxation to be achieved under Directive 2003/96.

 

·   The interpretative difficulties arise because Article 21(5), third subparagraph (concerning production for own use by small producers), has been drafted as an optional derogation using only the generic cross-reference ‘notwithstanding Article 14(1)(a)’, without specifying to which parts of Article 14(1)(a) this derogation relates. Greater precision and clarity in the drafting would unquestionably have been helpful.

 

·   That said, as a matter of logic the derogation in Article 21(5), third subparagraph, can refer only to the first sentence of Article 14(1)(a) (the mandatory prohibition on taxation of energy products and electricity as inputs for the production of electricity). The second and third sentences of Article 14(1)(a) contain a derogation from that mandatory exemption which forms an alternative to the derogation in Article 21(5), third subparagraph.

 

·   Neither the text of Directive 2003/96 nor its recitals and preparatory works provide guidance on how those two derogations from the mandatory exemption are meant to interrelate.

 

·   In my opinion, it follows directly from the conditions surrounding the two derogations that they cannot be considered to be in conflict. The environmental exclusion in Article 14(1)(a) may be applied to all producers; and the resulting tax proceeds fall outwith the scope of Directive 2003/96, as they do not count towards the calculation of minimum levels of taxation for the purposes of the Directive. The exemption for small producers in Article 21(5) applies only to production for own use; and the resulting tax proceeds fall within the scope of the Directive and count towards the calculation of the minimum levels of taxation.

 

·   That reading is further supported by the Court’s ruling in Cristal Union, which held that ‘in addition, it should be noted that, when the EU legislature intended to allow Member States to derogate from that regime of mandatory exemption, it did so explicitly in, respectively, the second sentence of Article 14(1)(a) of Directive 2003/96, which states that Member States may tax energy products used to produce electricity for reasons relating to the protection of the environment, and in the third subparagraph of Article 21(5) of that directive, under which Member States which exempt electricity generated by small producers of electricity must tax the energy products used for the generation of that electricity’.

 

·   I therefore propose that the answer to the second question should be that Article 21(5), third subparagraph, of Directive 2003/96, as a derogation from the mandatory exemption from taxation in Article 14(1)(a), first sentence, is independent of the environmental derogation from that exemption provided for by Article 14(1)(a), second and third sentences. Whilst taxes applied to small producers under Article 21(5), third subparagraph, are subject to the minimum levels of taxation in Directive 2003/96, taxes applied under the environmental derogation in Article 14(1)(a) are not subject to those minimum levels of taxation.

 

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