OPINION OF ADVOCATE GENERAL

KOKOTT

delivered on 11 December 2014 ( 1 )

Case C‑43/14

ŠKO-ENERGO, s. r. o.

v

Odvolací finanční ředitelství

(Request for a preliminary ruling

from the Nejvyšší správní soud (Czech Republic))

‛Climate protection — Scheme for greenhouse gas emission allowance trading within the Union — Method of allocating allowances — Allocation of allowances free of charge — Application of gift tax to the allocation free of charge — Electricity production’

I – Introduction

1. The Nejvyšší správní soud, the Supreme Administrative Court in the Czech Republic, has referred a question to the Court of Justice regarding the allocation of emission allowances free of charge in accordance with Directive 2003/87. ( 2 ) As in the Spanish case Iberdrola ( 3 ) this concerns electricity production; however, it does not concern a levy that is targeted specifically at absorbing windfall profits as a result of the allowance being allocated free of charge, but the levying of gift tax on that allocation.

2. It is therefore necessary to clarify whether that gift tax is compatible with the principle that emission allowances are allocated free of charge. In the event that the tax is incompatible with that principle, it must also be considered whether at least an amount of less than 10% of the value of all of the allowances allocated in the Member State may be levied, since the Member States must allocate only 90% of the allowances free of charge. In that regard, the Commission’s involvement in establishing the national allocation plan is of key importance.

II – Legal framework

A – EU law

3. Although the Nejvyšší správní soud refers to Directive 2009/29, ( 4 ) which amended Directive 2003/87, Article 3 of Directive 2009/29 provides that the version of Directive 2003/87 previously in force continued to apply until 31 December 2012. The taxation of the allocation of emission allowances for 2011 and 2012 at issue in the main proceedings must therefore be assessed on the basis of the old version.

4. The objectives and subject-matter of Directive 2003/87 are set out in Article 1: ‘This Directive establishes a scheme for greenhouse gas emission allowance trading within the Community (hereinafter referred to as the “Community scheme”) in order to promote reductions of greenhouse gas emissions in a cost-effective and economically efficient manner.’

5. The emission allowance is defined in Article 3(a) of Directive 2003/87: ‘For the purposes of this Directive the following definitions shall apply: (a) “allowance” means an allowance to emit one tonne of carbon dioxide equivalent during a specified period, …’

6. In accordance with Article 9(1) of Directive 2003/87, the Member States are to develop plans for the allocation of allowances: ‘For each period referred to in Article 11(1) and (2), each Member State shall develop a national plan stating the total quantity of allowances that it intends to allocate for that period and how it proposes to allocate them. The plan shall be based on objective and transparent criteria, including those listed in Annex III, taking due account of comments from the public.’

7. Article 9(3) of Directive 2003/87 governs the Commission’s powers with regard to the Member States’ allocation plans: ‘Within three months of notification of a national allocation plan by a Member State under paragraph 1, the Commission may reject that plan, or any aspect thereof, on the basis that it is incompatible with the criteria listed in Annex III or with Article 10. The Member State shall only take a decision under Article 11(1) or (2) if proposed amendments are accepted by the Commission. …’

8. The costs of emission allowances are stipulated in Article 10 of Directive 2003/87: ‘For the three-year period beginning 1 January 2005 Member States shall allocate at least 95% of the allowances free of charge. For the five-year period beginning 1 January 2008, Member States shall allocate at least 90% of the allowances free of charge.’

9. The actual allocation during the relevant period is set out in Article 11(2) of Directive 2003/87: ‘For the five-year period beginning 1 January 2008 … each Member State shall decide upon the total quantity of allowances it will allocate for that period and initiate the process for the allocation of those allowances to the operator of each installation. This decision shall be taken at least 12 months before the beginning of the relevant period and be based on the Member State’s national allocation plan developed pursuant to Article 9 and in accordance with Article 10, taking due account of comments from the public.’

10. Article 21(1) of Directive 2003/87 lays down the Member States’ reporting obligations: ‘Each year the Member States shall submit to the Commission a report on the application of this Directive. That report shall pay particular attention to the arrangements for the allocation of allowances … and issues relating to compliance with the Directive and on the fiscal treatment of allowances, if any. …’

B – Czech law

11. Directive 2003/87 was transposed into Czech national law by Law No 695/2004 on the conditions of greenhouse gas emission allowance trading and amending certain laws. That law governed inter alia greenhouse gas emission allowances and the scheme for allocating emission allowances.

12. The Law on gift tax was amended by Law No 402/2010, with effect from 1 January 2011. Pursuant to Paragraph 6(8) of the Law on gift tax, emission allowances acquired free of charge are subject to gift tax: ‘Gift tax shall be charged on the acquisition free of charge of greenhouse gas emission allowances in 2011 and 2012 for the production of electricity in an installation which on or after 1 January 2005 produced electricity for sale to third parties and in which no activity to which greenhouse gas emission allowance trading relates is carried out other than the combustion of fuels (hereinafter “allowance acquired free of charge”) by an electricity producer.’

13. Paragraph 7a of the Law on gift tax governs the basis of tax in the case of allowances acquired free of charge: ‘(1) In the case of allowances acquired free of charge, the basis of assessment to gift tax shall be the average market value of the greenhouse gas emission allowance on 28 February of the relevant calendar year multiplied by the number of allowances acquired free of charge for the production of electricity for the relevant calendar year. (2) The average market value of a greenhouse gas emission allowance on 28 February of the relevant calendar year shall be ascertained by the Ministry of the Environment by a method enabling distance access.’

14. The rate of gift tax for allowances acquired free of charge is set out in Paragraph 14a of the Law on gift tax: ‘The rate of gift tax in the case of allowances acquired free of charge shall be 32%.’

15. Paragraph 20 of the Law on gift tax exempts from gift tax, inter alia, the acquisition free of charge of emission allowances for the purposes of electricity produced from the cogeneration of electricity and heat.

16. The Nejvyšší správní soud states that the amendment to the Law on gift tax was, according to the statement of reasons for the law, to cover expenditure on support for electricity generation from renewable sources. The introduction of support led to a considerable increase in supported sources and at the same time a considerable decrease in investment costs for their construction, which made itself felt in the case of solar power plants in particular. It was therefore necessary to spend a large volume of funds on paying support to operators of solar power plants. One of the sources to cover that support was the revenue from the gift tax collected on emission allowances allocated free of charge.

III – Main proceedings and request for a preliminary ruling

17. The Czech Republic allocated ŠKO-ENERGO, s.r.o., (‘SKO’) emission allowances free of charge for the production of electricity in 2011 and 2012, but levied gift tax on them amounting to CZK 20473152 (currently equivalent to approximately EUR 740 000).

18. SKO objects to that taxation. In these proceedings, the Nejvyšší správní soud refers the following question to the Court of Justice: Must Article 10 of Directive 2003/87 be interpreted as preventing the application of provisions of national law which make the allocation free of charge of emission allowances in the relevant period subject to gift tax?

19. Written observations have been submitted by SKO, the Odvolací finanční ředitelství (Tax Appeal Board), the Czech Republic and the European Commission. With the exception of the Odvolací finanční ředitelství, those parties also attended the hearing on 19 November 2014.

IV – Legal assessment

20. The Nejvyšší správní soud seeks to ascertain whether imposing gift tax on the free-of-charge allocation of emission allowances in 2011 and 2012 is compatible with Article 10 of Directive 2003/87. It should be added that the Czech Republic is taxing only part of the allocation, namely allowances allocated for electricity production obtained by the combustion of fuels, with the exception of the cogeneration of electricity and heat.

21. Article 10 of Directive 2003/87, in the version applicable at the material time, provided for the allocation of at least 90% of the emission allowances free of charge.

22. It must first be considered whether the levying of gift tax is compatible with the principle that emission allowances are allocated free of charge (see A). Then the Czech Republic’s submissions that the extent of the taxation is less than 10% of the value of the allowances allocated and therefore does not breach the requirement that 90% of emission allowances are allocated free of charge must be examined (see B).

A – ‘Free-of-charge ’ allocation

23. The Court of Justice has already held that the allocation ‘free of charge’ under Article 10 of Directive 2003/87 precludes not only the direct fixing of a price for the allocation of emission allowances but also the subsequent levying of a charge in respect of their allocation. ( 5 )

24. The Czech Republic considers that — as in Iberdrola and Gas Natural — the tax serves only to absorb windfall profits arising from the allocation of emission allowances for electricity production. In that judgment, the Court of Justice allowed an absorption of that kind.

25. However, in response to that argument, I would point out that the Spanish provision examined in Iberdrola and Gas Natural was proven to absorb the windfall profits resulting from the use of allowances allocated free of charge. ( 6 ) Accordingly, it also taxes undertakings such as hydroelectric and nuclear power plants that do not need allowances but nevertheless make windfall profits because other undertakings integrate the allowance value into their prices. ( 7 )

26. Conversely, the gift tax on allowances allocated free of charge is not imposed on the basis of the use of the allowance, but only on the basis that the allowance has been allocated free of charge. It is therefore a charge that is levied subsequently in respect of the allocation. Accordingly, it is not compatible with the ‘free-of-charge’ nature of the allocation.

27. Contrary to the submissions of the Odvolací finanční ředitelství, that finding cannot be called into question by the fact that, as EU law stands at present, gift tax is not harmonised and therefore falls within the competence of the Member States. The Member States must exercise that competence consistently with EU law, ( 8 ) for, in accordance with Article 4(3) TEU, they are to refrain from any measure which could jeopardise the attainment of the European Union’s objectives.

28. Nor can the gift tax be justified under Article 193 TFEU. In accordance with that provision, the environmental regulations of the European Union are not to prevent any Member State from maintaining or introducing more stringent protective measures. Such a measure must follow the same policy of protecting the environment as the directive at issue ( 9 ) or be compatible with it. ( 10 ) The gift tax is however in conflict with the ‘free-of-charge’ nature of the allocation provided for in Article 10 of Directive 2003/87.

29. In the present case, the extent to which general taxes are able to affect emission allowances may also be left open, since the Czech gift tax is not targeted generally at the allocation of those allowances, but is very specific as to taxing the allocation of allowances for electricity production obtained by the combustion of fuels, with the exception of the cogeneration of electricity and heat. Allowances allocated for other activities, for example the production of steel, were not subject to that tax.

30. It must therefore be concluded that making the allocation subject to gift tax is incompatible with the allocation of emission allowances free of charge under Article 10 of Directive 2003/87.

B – The permitted chargeable allowance

31. The Czech Republic recalls, however, that Article 10 of Directive 2003/87 permits it to allocate 10% of emission allowances for consideration. The tax, it claims, is therefore permitted since the tax levied amounts to only 6.23% of the total value of the allowances it has allocated.

32. Although that fact is not mentioned in the request for a preliminary ruling, the Court of Justice should take it into consideration in order to provide the Nejvyšší správní soud with a useful answer. ( 11 )

33. At first sight, it raises difficult questions.

34. The Czech Republic has not merely taxed the allocation of 10% of allowances. According to the information it has provided, almost 20% of the allowances allocated were concerned. It is not obvious that such an extension of the taxation is compatible with Article 10 of Directive 2003/87 solely because the amount remains below 10% of the total value. Moreover, SKO and the Commission have rightly pointed out that the number of allowances and not their value is significant in terms of the directive. This is because the number of allowances represents the quantity of greenhouse gases to be released.

35. In addition it is necessary to clarify whether that burden should be imposed on a certain sector only, namely electricity production obtained by the combustion of fuels, with the exception of the cogeneration of electricity and heat. ( 12 )

36. However, these questions may be left open. In its national allocation plan approved by the Commission, the Czech Republic stated that, in principle, all emission allowances would be allocated free of charge. An auction was planned only for the unallocated allowances from the reserve for new entrants. ( 13 )

37. Although subsequent amendments to allocation plans are possible, their implementation requires the Commission’s approval in accordance with the second sentence of Article 9(3) of Directive 2003/87. ( 14 ) At the hearing, the Czech Republic conceded, however, that the gift tax on the allocation of allowances free of charge was not even incorporated subsequently into the allocation plan.

38. The Czech Republic submits that fiscal issues do not have to be provided for in the allocation plan. In that regard it relies on the reporting requirements in accordance with Article 21(1) of Directive 2003/87, which include in particular issues in connection with the fiscal treatment of allowances.

39. In response to that submission, however, it can be argued that it may be sufficient to report on the effects of general fiscal measures, in particular with regard to taxes which concern the use of allowances, but if the taxes are targeted specifically at the allocation free of charge of certain allowances, they affect the method of allocation which, in accordance with Article 9(1) of Directive 2003/87, must be specified in the allocation plan.

40. Furthermore, in accordance with Article 9(3) of Directive 2003/87, the Commission verifies whether an allocation plan by a Member State complies with Article 10. ( 15 ) To enable such verification, measures which are incompatible with the principle of allocation free of charge must either be part of the allocation plan from the start or at least be integrated by means of subsequent amendments.

41. The issues related to the taxation of the allocation could also have been discussed in detail in the dialogue with the Commission and in the public participation provided for under Article 9(1) and Article 11(2) of Directive 2003/87.

42. It might even have been possible to find a provision which, like the Spanish scheme considered in the judgment in Iberdrola, ( 16 ) is compatible with EU law. It should also be noted that the issue of determining the Spanish measures in the allocation plan did not arise since, in contrast to the Czech provisions at issue in the present case, they did not determine the allocation of allowances, but concerned the use of those allowances only. ( 17 )

43. It must therefore be concluded that making the allocation of emission allowances subject to gift tax where that taxation is not provided for in the national allocation plan is incompatible with Article 9 of Directive 2003/87.

V – Conclusion

44. I therefore propose that the Court answer the questions referred for a preliminary ruling as follows: (1) Making the allocation subject to gift tax is incompatible with the principle that emission allowances are allocated free of charge under Article 10 of Directive 2003/87/EC establishing a scheme for greenhouse gas emission allowance trading within the Community as amended by Regulation (EC) No 219/2009. (2) Making the allocation of emission allowances subject to gift tax where that taxation is not provided for in the national allocation plan is incompatible with Article 9 of Directive 2003/87.

( 1 ) Original language: German.

( 2 ) Directive 2003/87/EC of the European Parliament and of the Council of 13 October 2003 establishing a scheme for greenhouse gas emission allowance trading within the Community and amending Council Directive 96/61/EC (OJ 2003 L 275, p. 32) as amended by Regulation (EC) No 219/2009 (OJ 2009 L 87, p. 109).

( 3 ) Judgment in Iberdrola and Gas Natural (C‑566/11, C‑567/11, C‑580/11, C‑591/11, C‑620/11 and C‑640/11, EU:C:2013:660).

( 4 ) Directive 2009/29/EC of the European Parliament and of the Council of 23 April 2009 amending Directive 2003/87/EC so as to improve and extend the greenhouse gas emission allowance trading scheme of the Community (OJ 2009 L 140, p. 63).

( 5 ) Judgment in Iberdrola and Gas Natural (C‑566/11, C‑567/11, C‑580/11, C‑591/11, C‑620/11 and C‑640/11, EU:C:2013:660, paragraph 31).

( 6 ) See judgment in Iberdrola and Gas Natural (C‑566/11, C‑567/11, C‑580/11, C‑591/11, C‑620/11 and C‑640/11, EU:C:2013:660, paragraphs 28, 29 and 32 to 38).

( 7 ) Judgment in Iberdrola and Gas Natural (C‑566/11, C‑567/11, C‑580/11, C‑591/11, C‑620/11 and C‑640/11, EU:C:2013:660, paragraph 36).

( 8 ) See with regard to the taxation of a benefit provided for by EU law the judgment in Porto Antico di Genova (C‑427/05, EU:C:2007:630, paragraph 10) and in principle the judgments in Wielockx (C‑80/94, EU:C:1995:271, paragraph 16); X Holding (C‑337/08, EU:C:2010:89, paragraph 16); and Blanco (C‑344/13 and C‑367/13, EU:C:2014:2311, paragraph 24).

( 9 ) Judgment in Deponiezweckverband Eiterköpfe (C‑6/03, EU:C:2005:222, paragraph 41).

( 10 ) Judgment in Deponiezweckverband Eiterköpfe (C‑6/03, EU:C:2005:222, paragraph 52).

( 11 ) Judgments in Teckal (C‑107/98, EU:C:1999:562, paragraph 39); Abraham and Others (C‑2/07, EU:C:2008:133, paragraph 24); and Bonnier Audio and Others (C‑461/10, EU:C:2012:219, paragraph 47).

( 12 ) See in that regard my Opinion in Iberdrola and Gas Natural (C‑566/11, C‑567/11, C‑580/11, C‑591/11, C‑620/11 and C‑640/11, EU:C:2013:191, in particular points 96 and 97).

( 13 ) Národní alokační plán České republiky 2008 až 2012, pp. 6 (No 3), 13 and 29 (http://ec.europa.eu/clima/policies/ets/pre2013/nap/docs/nap_czech_final_en.pdf).

( 14 ) Judgment in Commission v Latvia (C‑267/11 P, EU:C:2013:624, paragraph 56).

( 15 ) Judgments in Commission v Poland (C‑504/09 P, EU:C:2012:178, paragraphs 47 and 81) and Commission v Estonia (C‑505/09 P, EU:C:2012:179, paragraph 49).

( 16 ) C‑566/11, C‑567/11, C‑580/11, C‑591/11, C‑620/11 and C‑640/11, EU:C:2013:660.

( 17 ) Judgment in Iberdrola and Gas Natural (C‑566/11, C‑567/11, C‑580/11, C‑591/11, C‑620/11 and C‑640/11, EU:C:2013:660, paragraphs 28, 29 and 38).