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ECJ Rules In Medicine Production Excise Duty Case

by Ulrika Lomas, Tax-News.com, Brussels

20 October 2015


The European Court of Justice has ruled that the excise duty exemptions provided for in Council Directive 92/83/EEC, concerning alcohol and alcoholic beverages, should be available for ethyl alcohol used to sterilize facilities for the manufacture of medicines.

The judgment – Bulgarian Customs Agency Director v. Biovet AD (Case C-306/14) – was released on October 15, 2015.

The appellant, Biovet, manufactures medicinal products and markets veterinary medicinal products, agricultural products, and medicinal products for human use. In its manufacturing of medicinal products, Biovet uses ethyl alcohol, in the form of a 70 percent water-based solution of ethanol, to clean and disinfect technical equipment, production facilities, and working areas and surfaces.

In September 2012, Biovet applied for a refund of excise duty paid on 271 liters of ethyl alcohol, which had been used for those purposes between August 1-31, 2012. The Head of the Plovdiv Customs Office, Bulgaria, refused to refund the excise duty.

Biovet brought an action against that decision before the Administrative Court, Sofia, Bulgaria, which held that cleaning and disinfection constitute different activities which form part of the process for the manufacture of a final product which does not contain alcohol, with the result that the excise duty that was paid on the acquisition of the alcohol used for disinfectant purposes was to be refunded pursuant to the relevant articles of domestic law – Article 22(4)(4) and Article 22(7) of the Law on excise duties and tax warehouses (ZADS).

The Director appealed against the judgment of the Court to the referring court, the Supreme Administrative Court, Bulgaria, which referred questions to the ECJ.

By its first and second questions, the referring court asked, in essence, whether Article 27(1)(d) of Directive 92/83 must be interpreted as meaning that the obligation to exempt laid down in that provision applies to ethyl alcohol used by an undertaking for cleaning or disinfecting equipment and facilities used in the production of medicines.

Article 27(1) of Directive 92/83 provides that: "Member states shall exempt the products covered by this Directive from the harmonized excise duty under conditions which they shall lay down for the purpose of ensuring the correct and straightforward application of such exemptions and of preventing any evasion, avoidance, or abuse:

  • (a) when distributed in the form of alcohol which has been completely denatured in accordance with the requirements of any member state, such requirements having been duly notified and accepted in accordance with paragraphs 3 and 4 of this Article;
  • (b) when both denatured in accordance with the requirements of any member state and used for the manufacture of any product not for human consumption; and
  • (d) when used for the production of medicines defined by [Council Directive 65/65/EEC of 26 January 1965]."

The ECJ said that the Administrative Court, Sofia, had been right to rule in favor of the taxpayer. It said that the exemption provided for in Directive 92/83 is not subject to conditions relating to whether they are directly used in the production of medicines or whether they form part of the composition of medicines. 

The ECJ said: "In accordance with the settled case-law of the [ECJ], the objective of the exemptions contained in Directive 92/83 is, in particular, to neutralize the impact of excise duties on alcohol used as an intermediate product in other commercial or industrial products."

"It is apparent from the file submitted to the Court that the disinfection of material, equipment, and facilities used for the production of medicines constitutes a necessary stage in the process of that production and that the use of ethyl alcohol is indispensable to such disinfection operations. In that regard, medicines have the peculiarity that, in comparison to other products, their production process is subject to compliance with very strict health rules. As the referring court notes, the disinfection operations at issue in the main proceedings seek in particular to eradicate pathogenic microorganisms, which are not permitted to be present in terms of the requirements regarding the germ content of medicinal products."

"It follows therefrom that, in so far as that disinfection is inherent in the production process for medicines, the ethyl alcohol used for that purpose must be regarded as being used 'for the production of medicines' within the meaning of Article 27(1)(d) of Directive 92/83."

"Consequently, in accordance with that provision, that alcohol must be exempt from the harmonized excise duty on the conditions laid down by the member state concerned for the purpose of ensuring the correct and straightforward application of the exemption laid down in that provision and of preventing any evasion, avoidance, or abuse," it concluded.

The ECJ ruled: "Article 27(1)(d) of Council Directive 92/83/EEC of October 19, 1992, on the harmonization of the structures of excise duties on alcohol and alcoholic beverages must be interpreted as meaning that the obligation to exempt laid down in that provision applies to ethyl alcohol used by an undertaking for cleaning or disinfecting equipment and facilities used in the production of medicines."

TAGS: court | compliance | tax | law | Bulgaria | excise duty | manufacturing | Europe

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