IQOS & Glo – Can heated tobacco be taxed additionally? Dispute over the compatibility of the Tobacco Tax Act with EU law

Manufacturers of smokeless cigarette alternatives have little to laugh about these days. After the German Bundestag decided in 2021 to amend the German Tobacco Tax Act and tax tobacco heaters and electronic cigarettes almost as much as conventional cigarettes, the European Court of Justice recently ruled in its judgement of 14 March 2024 (C 336/22) that such a tax increase is compatible with EU law.

But what is tobacco tax actually? And what does the European Court of Justice have to do with it?

Tobacco tax has been levied in Germany on tobacco products of all kinds, such as cigarettes, cigars and pipe tobacco, since 1906.

As an excise duty, tobacco tax is a so-called indirect tax. In the case of excise duty, taxes are levied on the consumption or use of certain goods or the utilisation of services. Apart from tobacco, alcohol and coffee are also subject to excise duty. Anyone who purchases these goods therefore pays excise duty on the corresponding products.

Tobacco tax is also a so-called special excise duty, which is regulated by federal law, with legislative competence falling to the federal government. The legal basis for tobacco tax is the German Tobacco Tax Act (TabStG).

Tobacco tax has been harmonised in the European Union since 1 January 1993. The German Tobacco Tax Act is therefore now largely based on common EU directives. For this reason, the European Court of Justice has jurisdiction when it comes to questions relating to German tobacco tax.

Until the end of 2021, tobacco strands imported into tobacco heaters were only taxed at the tax rate for pipe tobacco.

In 2021, however, the Bundestag decided to tax e-cigarettes and tobacco heaters at a higher rate from 2022 in addition to conventional cigarettes, cigars and cigarillos.

The law subjects nicotine-containing substances used in e-cigarettes to tobacco tax for the first time – previously, only VAT applied to them.

An additional tax was introduced for heated tobacco. § Section 2 (1) no. 5 TabStG now stipulates that an excise duty and a new additional tax must now be paid for heated tobacco.

f6 Cigarettenfabrik GmbH Co. KG filed a lawsuit against the main customs office in Braunschweig and brought an action before the Düsseldorf Fiscal Court because it considered the additional tax to be unlawful. In its opinion, the new German additional tax was not compatible with EU law, in particular not with Art. 1 Para. 2 of the Excise Duty Directive (Council Directive 2008/118/EC of 16 December 2008). According to this regulation, additional taxes can be levied on excise goods for special purposes.

The tax court was unable to answer the disputed legal questions with certainty in the tax court proceedings and made use of the option to suspend the court proceedings in accordance with Art. 267 of the Treaty on the Functioning of the European Union (TFEU) and refer them to the European Court of Justice.

The European Court of Justice found that the requirements of the EU Directive were met by the provisions of the national tobacco tax law.

On the one hand, heated tobacco falls under the term “smoking tobacco” within the meaning of EU law and is therefore subject to excise duty in accordance with Art. 1 para. 2 of the EU Directive in question.

On the other hand, a special purpose is fulfilled which justifies the imposition of an additional tax. The additional tax was intended to bring the taxation of heated tobacco closer to the taxation of cigarettes – with the aim of discouraging nicotine addicts from replacing cigarettes with tobacco, which is also harmful to health.

The competent tax court must now deal with the complaint again, taking into account the case law of the European Court of Justice, and make a decision on the matter.