Art. 110 TFEU: Internal Tax & Free Movement

Introduction

Article 110 TFEU stops Member States using internal taxes to give home‑grown products an advantage over goods from other EU countries. It works alongside the ban on customs duties in Article 30, targeting protectionism that appears not at the border but within domestic tax systems.

The rule has two parts. Article 110(1) bans discriminatory taxation of similar imported products. Article 110(2) bans taxation that protects domestic production against imported goods that, while not similar, compete in the market. Both parts look at real‑world effects, not just how a law is written.

Set against the post‑war aim of building a common market, the provision dates back to the Treaty of Rome. The Court of Justice has made it directly effective, so individuals and businesses can rely on it before national courts when a tax scheme breaches EU law.

What You’ll Learn

• What counts as an internal tax and how Article 110 differs from Article 30 TFEU
• The tests for “similar” and “competing” products
• How direct and indirect tax discrimination are identified
• When different tax rates can be justified by objective criteria
• Remedies and outcomes: equalisation, removal of protectionist effects, and refunds
• Key cases: Lütticke, Humblot, Chemial Farmaceutici, Commission v UK (Beer and Wine), Commission v Denmark, Outokumpu
• A step‑by‑step method to analyse any Article 110 problem

Core Concepts

Background and purpose

• Origin: Introduced in the Treaty of Rome to prevent Member States from favouring domestic goods through internal taxation once border measures (customs duties and charges having equivalent effect) were removed.
• Objective: Keep competition fair inside the single market by requiring internal taxes to apply in a neutral way to domestic and imported goods.
• Direct effect: Confirmed in Lütticke (Case 57/65). National courts must give effect to Article 110 and disapply conflicting national rules.

What counts as an internal tax?

• Internal taxes include general systems of excise, VAT, environmental taxes, registration taxes, and other charges applied systematically to products regardless of origin.
• The dividing line with Article 30: a charge triggered by crossing a frontier is caught by Article 30; a levy that forms part of a general internal system and applies to domestic products too falls under Article 110. See Outokumpu (C‑213/96).

Tip: Start every analysis by classifying the measure. If it is an internal tax applied domestically to both imported and local goods, Article 110 is the right tool.

Article 110(1): similar products and discrimination

• Rule: Imported products that are similar to domestic products must not be taxed more heavily.
• “Similar” is assessed by objective characteristics and typical use as consumers see them (e.g., alcohol content, ingredients, method of consumption).
• Types of discrimination:
  • Direct discrimination: tax rules refer to origin expressly (e.g., “imported spirits taxed at a higher rate”). This is almost always unlawful.
  • Indirect discrimination: neutral criteria in law (e.g., engine size, alcohol strength, packaging) that, in practice, burden imported products more than domestic ones.
• No protection by intention: it does not matter if the stated aim is neutral; the effect rules the day.
• Limited scope for justification: a differential is only acceptable if it rests on objective criteria unrelated to origin and does not protect domestic production. The measure must be appropriate and necessary for that neutral aim.

Key case themes:

• Humblot (112/84): engine‑capacity thresholds that targeted imported cars were indirect discrimination and breached Article 110(1).
• Chemial Farmaceutici (140/79): different tax for synthetic vs fermentation alcohol was allowed where based on objective production criteria, applied neutrally, and non‑protective.

Article 110(2): competing products and protection

• Rule: Even where goods are not similar, if they are in at least partial competition, taxation must not protect domestic products.
• “Competing” looks at consumer behaviour: if a price increase for one product leads consumers to switch to another, they compete (think beer and wine).
• Practical standard: Member States can set different rates, but the structure must avoid any protective effect. If a tax systematically favours the domestic drink or product category that locals produce, it will fail.
• Remedy focus: the solution is to remove the protective effect, often by rebalancing rates so domestic and imported goods compete on equal terms.

Key case themes:

• Commission v UK (170/78) (Beer and Wine): much higher tax on wine than beer protected domestic beer; breach of Article 110(2).
• Commission v Denmark (106/84): fruit wine and grape wine competed; a tax scheme favouring domestic fruit wine breached Article 110(2).

Distinguishing Article 110 from Articles 30 and 34

• Article 30: customs duties and charges having equivalent effect at the border. Not applicable where a levy is part of a general internal tax system applied to domestic and imported goods alike (then Article 110).
• Articles 34/35: non‑fiscal measures restricting trade (quantitative limits and measures having equivalent effect). Do not use these if the complaint is about internal taxation; Article 110 is the lex specialis for tax.
• Overlap check: if a levy is triggered by importation only and not charged on domestic products, it is likely Article 30. If it is charged on both imported and domestic products by reference to an internal criterion, it falls under Article 110.

Justification, structure, and proof

• Acceptable aims: genuine environmental, health, or industrial‑organisation aims can support different rates, but only if they are origin‑neutral and the design avoids a protective effect (Chemial Farmaceutici).
• Evidence: authorities may rely on data on composition, use, cross‑price effects, and market shares to show neutrality; challengers can use the same to show protection.
• Proportionality: the measure must fit the stated aim. If a less discriminatory design can achieve it, the current tax will fail.

Key Examples or Case Studies

Lütticke (Case 57/65)

• Context: Article 95 EEC (now 110 TFEU) duties were invoked directly in national proceedings.
• Key point: Article 110 has direct effect. Individuals and companies can rely on it in domestic courts to challenge discriminatory internal taxation.
• Why it matters: If you identify a breach, a court can disapply the offending tax and order appropriate remedies, including refunds.

Humblot v Directeur des Services Fiscaux (Case 112/84)

• Context: French car tax had steep jumps at engine‑size thresholds; high‑powered cars were largely imported.
• Key point: Neutral criteria can still discriminate if, in practice, they fall mainly on imports. The tax structure created an unjustified burden on imported cars.
• Takeaway: Look at market reality; thresholds that map onto origin are risky under Article 110(1).

Chemial Farmaceutici v DAF SpA (Case 140/79)

• Context: Different excise treatment for synthetic and fermentation alcohol.
• Key point: A differential is lawful if it is based on objective criteria unrelated to origin, pursues a legitimate aim, and is not protective in effect.
• Takeaway: Article 110 does not force identical rates; it requires non‑protection and objective design.

Commission v United Kingdom (Case 170/78) (Beer and Wine)

• Context: Wine (mostly imported) taxed much more than beer (mostly domestic).
• Key point: Even if wine and beer are not similar, they compete. A large tax gap that shifts demand towards domestic beer is protective and breaches Article 110(2).
• Remedy: Adjust rates to remove the protective effect; identical rates are not always required, but the competitive balance must be fair.

Commission v Denmark (Case 106/84)

• Context: Taxed grape wine more heavily than fruit wine (domestic production focused on fruit wine).
• Key point: Fruit wine and grape wine were at least in partial competition. The system protected domestic production and was unlawful.
• Takeaway: For competition analysis, evidence of substitution and market patterns carries weight.

Outokumpu (C‑213/96)

• Context: Electricity tax with exemptions and different rates.
• Key point: Clarified the boundary between Article 30 and Article 110 and reaffirmed that objective, origin‑neutral criteria can justify different rates under Article 110, provided there is no protection.
• Takeaway: Always classify the measure first; then test neutrality and effect.

Practical Applications

Use this step‑by‑step method to assess any measure under Article 110:

1. Classify the levy

   • Is it triggered by importation as such? If yes, consider Article 30.
   • Is it part of a general domestic tax system applied to both domestic and imported goods? If yes, Article 110 applies.

2. Identify the comparator group

   • Are the imported and domestic items “similar”? Check characteristics and use as consumers see them.
   • If not similar, are they nonetheless in competition? Consider price sensitivity and substitution patterns.

3. Choose the correct limb

   • Similar goods → Article 110(1).
   • Competing, non‑similar goods → Article 110(2).

4. Test for discrimination or protection

   • Direct discrimination: rate or rule refers to origin. Normally unlawful.
   • Indirect discrimination: neutral criterion that, in practice, hits imports more (e.g., engine size, bottle size, alcohol thresholds).
   • Protection: under 110(2), a structure that shifts demand towards domestic goods is unlawful.

5. Examine justification and design

   • Is there a legitimate, origin‑neutral aim (e.g., health, environment)?
   • Are the criteria objective (e.g., alcohol content) and applied consistently?
   • Is the design proportionate, or is there a less discriminatory alternative that achieves the aim?

6. Determine the remedy

   • For 110(1): remove discriminatory differential; consider refunds.
   • For 110(2): adjust rates to eliminate the protective effect, not necessarily to identical levels.
   • National courts disapply offending rules; claims for repayment may follow domestic procedural rules (subject to EU principles of equivalence and effectiveness).

7. Consider related provisions

   • If a measure looks like a product rule rather than a tax, Articles 34/35 may be relevant instead.
   • If the tax includes exemptions that resemble selective advantages, State aid rules (Article 107 TFEU) may also be in play.

Common pitfalls to avoid:

• Treating any difference in rate as unlawful. Differences may be fine if objectively justified and non‑protective.
• Ignoring effects. A neutral text can still be discriminatory once you examine market data.
• Skipping the classification step. Misclassifying a border charge as an internal tax leads to the wrong legal test.

Summary Checklist

• Is the measure an internal tax (Article 110) rather than a border charge (Article 30)?
• Are the products similar (110(1)) or merely competing (110(2))?
• Does the tax scheme cause direct or indirect discrimination (110(1))?
• Does the scheme protect domestic production by shifting demand (110(2))?
• Are differences based on objective, origin‑neutral criteria and proportionate?
• Have you considered key cases: Lütticke, Humblot, Chemial Farmaceutici, Commission v UK, Commission v Denmark, Outokumpu?
• What remedy removes the discrimination or protection? Equalise or restructure rates accordingly.
• Can claimants seek refunds in line with national procedural rules and EU principles?

Quick Reference