OPINION OF ADVOCATE GENERAL

delivered on 12 October 1995 (*1)

The Chambre Commerciale of the French Cour de Cassation has referred the following question to the Court for a preliminary ruling:

‘... whether Article 95 of the Treaty is to be interpreted as meaning that it prohibits the application of legislation, such as that in issue in the present case, introducing a taxation system for motor vehicles where the progression coefficient is greater for tax bands from 19 CV, which concern only vehicles imported from other Member States, than the coefficient applicable to the bands from 12-14 CV (which includes three fiscal horsepower values) to 17-18 CV, which concern essentially vehicles made in France capable of being considered similar to imported products of more than 19 CV.’

Facts

The applicant in the main proceedings, Mrs Jacquier (née Casarin), owns a Mercedes motor car which, for the purposes of French road tax, is regarded as having a power rating of 40 CV (fiscal horsepower). The car was first registered in 1987. Mrs Jacquier was charged FF 10832 road tax for the year 1990. That amount was calculated according to Article 1599 G of the Code Général des Impôts (General Tax Code), as amended by the Law of 30 December 1987. She lodged a complaint with the relevant tax authorities contesting the amount of the tax and claiming a partial refund. Her complaint was rejected on 20 September 1990. She then brought an action before the Tribunal de Grande Instance, Lons-le-Saunier, which dismissed her action by a judgment of 3 December 1991. Mrs Jacquier appealed against that judgment to the Cour de Cassation, contending that the French differential road tax system was discriminatory and contrary to Article 95 of the Treaty because there was a break in the progression of the coefficients used for the purpose of calculating the tax between the 17-18 CV tax band and the higher bands from 19 CV. Since it was uncertain whether the French system was compatible with Article 95 of the Treaty, the Cour de Cassation referred to the Court the question set out above.

The relevant French legislation and previous rulings of the Court

Articles 1599 C to 1599 J of the Code Général des Impôts lay down the basic provisions governing the differential road tax. The structure of the tax is established at the national level but it is levied by each département. Every type of vehicle placed on the market in France is given for tax purposes a ‘power rating’ calculated according to a complex formula. The power ratings are divided into bands of two or three ratings in each band. A coefficient is fixed for each tax band. Each year a basic rate of tax is fixed for each département by its own authorities. The basic tax thus fixed is multiplied by the coefficients fixed at the national level to determine the amount of the differential tax payable for the corresponding tax bands. Thus, the amount of tax payable on any given vehicle may vary from one département to another but the structure of the tax is established nationwide and is the same throughout the country.

The Court has already had occasion to give three rulings on the compatibility of the French road tax system with Article 95 of the Treaty. In the first case, Humblot ν Directeur des Services Fiscaux, the Court was asked whether it was compatible with Article 95 of the Treaty to impose both a differential tax on cars rated at 16 CV or less and a special tax, levied at a single and considerably higher rate, on vehicles of more than 16 CV. The Court first of all made the following general observation concerning progressive systems of road tax:

‘... as Community law stands at present the Member States are at liberty to subject products such as cars to a system of road tax which increases progressively in amount depending on an objective criterion, such as the power for tax purposes, which may be determined in various ways.’

The Court added however:

‘Such a system of domestic taxation is, however, compatible with Article 95 only in so far as it is free from any discriminatory or protective effect.’

The Court considered that that requirement was not met by a system such as the French one where the special tax was several times the highest amount of the progressive tax payable on cars of 16 CV or less and where the only cars subject to the special tax were imported, in particular from other Member States. It noted that:

‘... liability to the special tax entails a much larger increase in taxation than passing from one category of car to another in a system of progressive taxation embodying balanced differentials like the system on which the differential tax is based.’

The French legislature then adopted Article 18 of Law No 85/695 of 11 July 1985 in order to comply with that judgment. Article 18 abolished the special fixed tax on cars with a power rating of over 16 CV. Thus, only the differential system remained. It operated as described above. However, Article 18 of that Law created four new tax bands with the result that there were nine tax bands in total, namely: up to 4 CV, from 5 to 7 CV, 8 and 9 CV, 10 and 11 CV, from 12 to 16 CV, 17 and 18 CV, 19 and 20 CV, 21 and 22 CV and 23 CV and over. It also fixed a coefficient for each tax band (1; 1.9; 4.5; 5.3; 9.4; 14.1; 21.1; 31.7; 47.6 respectively). The formula for calculating the power rating was laid down in an administrative circular of 23 December 1977.

In the second case, Feldain ν Directeur des Services Fiscaux du Département du Haut-Rhin, the Court was asked whether the system, as modified following the judgment in Humblot by Law No 85/695 of 11 July 1985, was compatible with Article 95 of the Treaty. One of the issues was whether it was compatible with Article 95 of the Treaty to establish a system whereby the progression of the coefficients became ‘exponential’ beyond the 12 to 16 CV tax band, which was the last one to include vehicles manufactured in France. The Court held that:

‘... the factor of progression of the coefficients is between 1.2 and 2.4 for the tax bands below 16 CV, whilst it is 1.5 for higher tax bands. Thus, the progression of the coefficients does not display any significant difference of such a kind as to indicate that there is any discriminatory or protective effect in favour of cars manufactured in France.’

However, the Court did find that the tax system was discriminatory in two respects:

The arrangement of the tax bands was such that top-of-the-range cars manufactured in France fell in the 12-16 CV tax band and only vehicles from other Member States came within the tax bands above 16 CV. Because the 12-16 CV band was a broad one (the only one containing five power ratings whereas all the others comprised two or three power ratings) top-of-the-range cars manufactured in France were protected from the normal progression of the tax.

The method of determining the power rating itself was not objective and favoured cars manufactured in France.

The Court came to the same conclusion in the third case, Seguela ν Administration des Impôts.

The French legislature adopted new legislation to comply with the judgment in Feldain. Article 20 of Law No 87-1061 of 30 December 1987 amended Article 1599 G of the Code Général des Impôts by splitting the old band of 12-16 CV into two, creating a total of 10 instead of 9 bands. Consequently, there is now a band for 12-14 CV and another for 15-16 CV. The coefficient for the former 12-16 CV band (9.4) became the coefficient for the new 12-14 CV band, the new 15-16 CV band being allocated a newly created coefficient of 11.5. The coefficients under the present legislation are therefore as follows: 1, 1.9, 4.5, 5.3, 9.4, 11.5, 14.1, 21.1, 31.7 and 47.6.

Furthermore, a new Ministerial Circular of 12 January 1988 modified the method of determining the power rating which was laid down in the Circular of 23 December 1977. The new Circular changed that part of the method which the Court held to be contrary to Article 95 of the Treaty in Feldain. Law No 93/859 of 22 June 1993 gave force of law with retroactive effect to that Circular.

13.The national court's question in these proceedings is whether under the present legislation the increase in the rate of progression of the tax after the 17-18 CV band is compatible with Article 95. It is therefore concerned with the relationship between the coefficients, that is to say the manner in which there is a progression from one coefficient to the next. That relationship is expressed as a factor which, when multiplied by the coefficient for a particular tax band, produces the coefficient for the next band. In its order for reference the Cour de Cassation calculated the factors of progression of the coefficients for the bands from 12 CV upwards as follows:

Bands

Progression factor

from 12-14 CV to 15-16 CV

from 15-16 CV to 17-18 CV

from 17-18 CV to 19-20 CV

from 19-20 CV to 2I-22 CV

from 2I-22 CV to 23 CV & over

It considered that it was unnecessary to have regard to the tax bands below 12 CV because the vehicles in those bands could not be deemed comparable to cars classed in the bands of 19 CV and above.

14.It appears that the Cour de Cassation made a mistake in calculating the rate of progression between the 17-18 CV and 19-20 CV bands and the 19-20 CV and 2I-22 CV bands. The following table sets out the correct factors (subject to minor rounding variations), together with hypothetical amounts of road tax payable for each band on the assumption that the tax for a car in the 0-4 CV band is FF 200:

Bands

Progression factor

Tax for higher band

from 0-4 CV to 5-7 CV

380

from 5-7 CV to 8-9 CV

7901

from 8-9 CV to 10-11 CV

1063

from 10-11 CV to 12-14 CV

1881

from 12-14 CV to 15-16 CV

2295

from 15-16 CV to 17-18 CV

2823

from 17-18 CV to 19-20 CV

4234

from 19-20 CV to 2I-22 CV

6351

from 2I-22 CV to 23 CV & over

9527

Article 95 and the taxation of motor vehicles

15.The essential issue in this case is whether the French progressive system is structured in such a way as to place imported motor vehicles at a disadvantage. As a preliminary matter it is therefore necessary to consider how the comparison between French and imported vehicles is to be performed in the case of such a system.

The Court has held that the purpose of Article 95 is to:

‘ensure free movement of goods between the Member States in normal conditions of competition by the elimination of all forms of protection which result from the application of internal taxation which discriminates against products from other Member States. ... Article 95 must guarantee the complete neutrality of internal taxation as regards competition between domestic products and imported products’.

Accordingly, products are regarded as similar for the purposes of the first paragraph of Article 95 where they ‘have similar characteristics and meet the same needs from the point of view of consumers’.

It is true that all cars have similar characteristics and meet the same needs in the sense that they all have an engine and wheels and provide motorised transport for one or more persons. However, as Advocate General Mischo noted in Commission v Greece, it cannot seriously be argued that, for example, a small car with an engine of less than 1000 cc would be regarded by consumers as a substitute for a top-of-the-range saloon car with an engine of 2500 cc or more. In practice there is a continuum of competitive relationships. The degree of competition between two models depends on the extent to which they meet various requirements regarding price, style, size, comfort, performance, fuel consumption, durability, reliability and other matters. Requirements of consumers differ, and power rating is certainly not the sole factor in determining the degree of competition between two cars. It is nevertheless a very important factor since engine size and power are often closely linked to other factors such as size, comfort, performance and price. For example, large comfortable saloon or estate cars generally have larger engines with higher power ratings than small cars designed primarily for town driving. On the whole, therefore, there is likely to be a closer competitive relationship between vehicles in neighbouring tax bands. In considering the national court's question it is therefore necessary to look closely at the structure of the tax in the higher bands where the supposed break in progression occurs.

19.Before turning to the substance of the case, I should deal briefly with the doubts expressed by the Commission concerning the admissibility of the reference. It points out that the referring court asks whether the fact that the rate of progression of the coefficients for the tax bands above 18 CV increases by comparison with the coefficients for the tax bands from 12-14 CV to 17-18 CV constitutes discrimination contrary to Article 95 of the Treaty. The Commission doubts whether Mrs Jacquier's motor car, which has a very high power rating of 40 CV, can be regarded as similar for the purposes of Article 95 to the domestically produced vehicles in the 15-16 and 17-18 CV tax bands.

20.In my view the national court's question cannot be dismissed as having no relevance to the proceedings before it. As already explained, whether goods are similar for the purposes of the first paragraph of Article 95 depends on whether their characteristics and the needs which they serve place them in a competitive relationship. It is not impossible that a sharp rise in the road tax for cars in the last three bands might lead a consumer who would otherwise purchase a car in the highest tax band to opt for a French model in the 17-18 CV tax band. It may be true that some consumers would choose a more powerful motor car regardless of the amount of the road tax. However, for many consumers who would otherwise consider a more powerful car, the cost of the road tax may be a significant factor provided their minimum requirements regarding performance, size and comfort are met.

Substance

21.The essential issue in this case is whether the French progressive system is structured in such a way as to place imported motor vehicles at a disadvantage. As a preliminary matter it is therefore necessary to consider how the comparison between French and imported vehicles is to be performed in the case of such a system.

Mrs Jacquier's complaint is not the progressive nature of the tax system as such. The Court has recognized that Member States have the right to apply progressive systems of taxation based on objective criteria. The mere fact that the most heavily taxed bands comprise only imported vehicles does not of itself render the French system discriminatory or protective; (13) indeed the absence of domestic production in the highest tax bands is a possible consequence of a progressive system.

22.A progressive system of taxation may however be considered to have a discriminatory or protective effect if the progressivity is structured so as to place imports from other Member States at a disadvantage. In Feldain, as we have seen, the Court held the French system then in force to be incompatible with Article 95 because the method of calculating the power ratings and the manner in which the power ratings were distributed amongst the tax bands shielded domestic motor cars from the normal progression of the tax. In the present case the issue is whether the increase in the rate of progression of the tax after the 17-18 CV band constitutes an infringement of Article 95.

23.In order to determine whether an issue arises under Article 95, it is necessary to examine the structure of the tax as set out in the table in paragraph above. For the reasons given earlier, I do not consider it relevant that there are higher factors of progression in the lower tax bands. It is the structure of the tax in the higher bands that is critical. It is apparent from the table that the tax increases comparatively slowly between 12 and 18 CV. However, owing to the exponential character of the system and the large number of bands, the apparently modest increase in the rate of progression from 1.23 to 1.5 after the 17-18 CV band leads to a sharp increase in tax in the last three bands. That can be seen clearly if the figures set out in the table for the last three bands based on the actual rate of 1.5 (FF 4234, FF 6351 and FF 9527) are compared with the much lower figures which would result if the tax continued to increase at the rate of 1.23 (FF 3472, FF 4271 and FF 5253). It seems to me that the increase in tax is sufficiently steep to raise the question of its compatibility with Article 95.

24.However, the increase in progression does not appear to work to the disadvantage of imports in the way alleged. The Cour de Cassation's question posits that the cars in the bands from 12 to 18 CV are essentially of domestic manufacture, whereas cars in the higher bands are exclusively imported. However, according to the figures for the year 1990 presented by the French Government in its written reply to a question put by the Court, while in the 15-16 CV band 13158 French cars and 2947 foreign cars were sold, in the 17-18 CV band only 11 French cars were sold as against 3578 foreign cars. French manufacturers have since increased their market share in the 17-18 CV band, but it is common ground between the parties that their share remains very small (at the hearing the applicant mentioned a figure of 5%, the French Government 6.8%).

25.I would refer in this connection to the judgment in Commission ν Greece, (14) where the Commission contended that an excessive increase in the Greek special consumption and single supplementary taxes on cars with engines of over 1800 cc placed domestically produced cars at an advantage. The Court dismissed that contention on the following grounds:

‘If it is assumed that the particular features of the system of taxation at issue actually discourage certain consumers from purchasing cars of a cylinder capacity greater than 1800 cc, those consumers will choose either a model in the range of cars having cylinder capacities between 1600 and 1800 ce or a model in the range of cars having cylinder capacities below 1600 cc. All the models in the first-mentioned range are of foreign manufacture. The second range includes cars of both foreign and Greek manufacture. Consequently, the Commission has not shown how the system of taxation at issue might have the effect of favouring the sale of cars of Greek manufacture.’ (15)

26.In the present case cars of 19 CV and over may be presumed, for the reasons given earlier, to be in closest competition with cars in the preceding band, 17-18 CV. The situation in the present case is therefore similar to that in Commission ν Greece in so far as the cars in the 17-18 CV band are predominantly imported. The competitive advantage resulting from the increase in progression does not therefore appear to affect imported cars adversely.

27.It might be objected that some consumers who were deterred from purchasing cars of 19 CV or more would opt for cars in the 15-16 CV band, in which the majority of cars sold are of French manufacture. However, although imported models account for a relatively small proportion of sales in that band, there appears to be a large choice of imported models on the market. Consumers who were induced to choose a car in the 15-16 CV band would seem equally likely to purchase an imported car. Moreover, the structure of the tax is such that the increase in tax between the 15-16 CV and 17-18 CV bands is relatively small; there is therefore no great tax inducement for consumers whose preference is for powerful cars to purchase the cars in the 15-16 CV band.

Conclusion

28.Accordingly, I am of the opinion that the Court should give the following ruling in reply to the question referred to it by the French Cour de Cassation:

Article 95 of the EC Treaty does not preclude the application of legislation introducing a progressive system of road tax for motor vehicles, such as that in issue in the main proceedings, where the tax is not structured in such a way as to lead consumers to choose domestically produced vehicles in preference to vehicles imported from other Member States.

*1 Original language: English.

1 Case 112/84 [1985] ECR 1367.

2 At paragraph 12 of the judgment.

3 Ibid, at paragraph 13 of the judgment.

4 Second sentence of paragraph 15 of the judgment.

5 Case 433/85 [1987] ECR 3521.

6 Ibid. at paragraph 13 of the judgment.

7 Ibid, at paragraph 14 of the judgment.

8 Ibid, at paragraphs 15 and 16 of the judgment.

9 Joined Cases 76/87, 86/87 to 89/87 and 149/87 [1988] ECR 2397.

10 Case 169/78 Commission ν Italy [1980] ECR 385, at paragraph 4 of the judgment.

11 Ibid., at paragraph 5 of the judgment.

12 Case C-132/88 [1990] ECR I-1567; see paragraph 8 of the Opinion at p. I-1577.

13 Sec Commission ν Greece, cited at note, at paragraph 18 of the judgment.

14 Cited at note 12.

15 Ibid-, at paragraph 20 of the judgment.