Nuclear fuel tax case reverts to German courts

10 June 2015

The tax levied on nuclear fuel in Germany does not contravene European law. This was the conclusion of the European Court of Justice (ECJ) on 4 June. But what about German law and the consequences for nuclear power plant operators across Europe, asks Tobias Leidinger.

The Hamburg Finance Court had doubted whether the country's Nuclear Fuel Tax Act was compatible with European law. In the context of an action lodged by a nuclear power plant operator against this tax, the court had suspended the legal action and submitted various legal questions to the ECJ. The decision now taken by the ECJ is not really surprising considering that in his opinion, in February, the Advocate General had already argued that the tax was compatible.

Special aspects of the case

The litigation concerning German nuclear fuel tax features two special aspects:

In procedural terms, it is unusual for both the European Court of Justice and the domestic constitutional court - the Federal Constitutional Court (Bundesverfassungsgericht) - to be seized by one and the same legal dispute at the same time ('parallelism of preliminary ruling proceedings'). Moreover, it is striking that the core issue in both proceedings is whether nuclear fuel tax constitutes 'excise duty' or not. The ECJ has committed itself in that regard: it does not constitute excise tax. For that reason, the nuclear fuel tax conforms to European law. If the Federal Constitutional Court were to follow this legal assessment however, the tax would be deemed impermissible under German constitutional law.

Parallelism of preliminary rulings

The ECJ has now, for the first time, made a clear decision on the admissibility of preliminary ruling proceedings referred to the ECJ and to the domestic constitutional court in parallel: Article 267 TFEU not only entitles the domestic court but even obliges it to submit issues that are decisive for the dispute to the European Court of Justice for interpretation or a decision on the applicability of European law. Such an obligation and the issue of incompatibility with European law did not depend on whether the same provision had been submitted to the domestic court for review or not. After all, even if a provision has been declared unconstitutional under domestic law it will still remain applicable for a certain period of time.

The judgment of the ECJ is convincing in that regard. It is right to regard and handle both proceedings and their respective subject-matter independently.

Excise duty

As to the substance of the case, the ECJ has decided that the nuclear fuel tax cannot be deemed excise duty on electricity, in which case it would therefore be incompatible with arrangements for the harmonisation of excise duty in the European Union (Council Directive 2008/118/EC). It lacks the nature of 'excise duty' since it cannot be assumed that the nuclear fuel tax can be 'passed on' to the consumer. In the absence of 'excise duty', however, there is no violation of Council Directive 2008/118/EC. The Advocate General had already argued in that vein: it was not the abstract possibility of passing on the tax that was decisive in that regard (to assess it as an indirect, impermissible tax) but it was the impossibility of being able to pass it on to the consumer in the specific case, that is, within the pricing mechanisms in Germany ('merit order'). According to the merit order, electricity generated from nuclear energy virtually never influences price formation for electricity traded over the European Energy Exchange (EEX).

The outcome of the preliminary ruling proceedings at the Federal Constitutional Court also depends on the question of whether excise duty exists or not. For under German constitutional law the federal government has legislative competence in respect of excise duty only (Article 106 Basic Law). It is a matter of dispute as to when excise duty as defined in that Article may be assumed. It is mostly argued that this may only be assumed to be the case where such tax is passed on to the consumer or electricity customer in actual fact and not only in theory (also the argument of the ECJ). Since this is not so in Germany - owing to pricing mechanisms (merit order) - this tax does not constitute excise duty, in which case the nuclear fuel tax would then, for lack of legislative competence, be impermissible. According to a different opinion, however, it would suffice for excise duty within the meaning of Article 106 Basic Law to be passed on to the consumer merely in principle (in abstracto). The fact that this did not actually happen did not conflict with the assumption of excise duty.

The Federal Constitutional Court must now decide whether the German concept of excise duty is to be interpreted in accordance with the EU directive issued to harmonise these very taxes or whether there is some flexibility allowing a different decision.

It will therefore be interesting to see whether the Federal Constitutional Court will follow the argument of the European Court of Justice in assessing the concept of excise duty. Should the Federal Constitutional Court decide differently from the European Court of Justice, then the concept of excise duty may conflict with European law and with ECJ case law. In that case, the question would also arise of whether a domestic constitutional court would not be obliged to refer to the European Court of Justice beforehand.

Consequences for suppliers

In Germany, all will remain the same in the aftermath of the ECJ decision, at least for the time being until the decision of the Federal Constitutional Court that is expected by the end of this year: the suppliers (EOn, RWE, EnBW, Vattenfall) that use nuclear fuel to generate electricity will, in the meantime, still be obliged to pay this tax. Should the Federal Constitutional Court also find the tax compatible with constitutional law, no reimbursement of the nuclear fuel tax paid since 2011 would then be possible. On the contrary, it could be assumed that the term for the tax originally limited to the end of 2016 would even be prolonged to 2022, when the last nuclear power plant in Germany will be taken off the grid. Demands to that effect are already being mooted in political circles in Germany. That would place a substantial extra tax burden on suppliers, entailing further negative consequences as regards their competitiveness and profitability.

Should, however, the Federal Constitutional Court deem the nuclear fuel tax unconstitutional, this would need to be taken into consideration by finance courts and tax authorities. The tax authorities would then be obliged to refund to the suppliers the nuclear fuel tax paid since 2011, regardless of the fact that such tax is compatible with European law. No further levy or prolongation of the tax by law would be permissible.

Given the ECJ decision, it cannot be ruled out that other European Member States, following Germany's example, might have the idea of introducing a nuclear fuel tax to put their national budgets on a sounder footing. No aspect of European law would now stand in the way of such a levy in any event. Whether or not this would be a wise decision in economic and fiscal terms is another matter, however.

Dr Tobias Leidinger

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Tobias Leidinger, a lawyer at GLEISS LUTZ, Düsseldorf, specialises in energy law and is an expert on nuclear energy law. He also is a published energy and environmental law specialist.