Proposal for a Council Directive amending Directive 2003/96/EC as regards the possibility for Cyprus to apply, in respect of energy products and electricity, temporary exemptions or reductions in the levels of taxation
Date: 2004-03-22
Institutions: European Commission
Subjects: Cyprus, electrical energy, energy-generating product, tax exemption, tax system

COMMISSION OF THE EUROPEAN COMMUNITIES 

Brussels, 22.3.2004 
COM(2004) 185 final 

2004/0067 (CNS) 

Proposal for a 

COUNCIL DIRECTIVE 

amending Directive 2003/96/EC as regards the possibility for Cyprus  
to apply, in respect of energy products and electricity, temporary exemptions 
or reductions in the levels of taxation 

(presented by the Commission) 

EN 

   EN 

 
 
 
  
EXPLANATORY MEMORANDUM 

1. 

INTRODUCTION 

Council  Directive  2003/96/EC  restructuring  the  Community  framework  for  the  taxation  of 
energy products and electricity (hereafter the "Directive") was adopted on 27 October 20031. 
It will enter into force on 1 January 20042. 

As  for  the  current  Member  States,  acceding  Member  States  need  certain  transitional 
arrangements to cope with the new requirements introduced by the Directive. On 28 January 
2004, the Commission presented on this regard a proposal for a Council Directive amending 
certain  Member  States  
Directive  2003/96/EC 
to  apply, 
temporary  exemptions 
or reductions in the levels of taxation3. All Acceding states, except for Cyprus, are included in 
the proposal. This is due to  the fact that  Cyprus  did not submit at that time any  request  for 
transitional arrangements. 

respect  of  energy  products  and  electricity, 

the  possibility 

regards 

for 

as 

in 

However, the situation in Cyprus has evolved, and the Cyprus authorities introduced in early 
February 2004 specific demands for transitional periods. 

The Commission, therefore, has to propose a directive, based on Article 93 of the EC Treaty, 
to amend the Directive. 

2. 

THE ACCESSION TREATY 

Cyprus  benefits  from  two  specific  derogations  in  the  Treaty  of  Accession  to  the  European 
Union 20034: 

Without  prejudice  to  a  formal  decision  to  be  adopted  according  to  the  procedure  set  out  in 
Article 8(4) of Directive 92/81/EEC, Cyprus may apply an exemption from excise duties on 
mineral oils used for the production of cement until one year after the date of accession. 

Without  prejudice  to  a  formal  decision  to  be  adopted  according  to  the  procedure  set  out  in 
Article  8(4)  of  Directive  92/81/EEC,  Cyprus  may  also  apply  an  exemption  from  additional 
excise duties on all types of fuel used for local passenger transport until one year after the date 
of accession. 

Directives 92/81/EEC and 92/82/EEC were repealed as from 31 December 2003. 

3. 

THE ENERGY TAX DIRECTIVE 

The  Directive  widens  the  scope  of  the  previous  mineral  oils  directives  to  nearly  all  energy 
products,  including  coal  and  gas,  and  electricity.  It  also  updates  the  minimum  rates  for 
mineral oils which have not been revised since 1992. The Directive will reduce distortions of 

1 
2 

3 
4 

OJ L 283, 31.10.2003, p. 51. 
Measures concerning biofuels and individual derogations, granted on the basis of Article 8 paragraph 4 
of Directive 92/81/EEC, enter retroactively into force on 1 January 2003. 
COM(2004) 42 of 28.1.2004. 
OJ L 236, 23.9.2003, p. 17. 

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competition that currently exist between Member States as a result of divergent rates of tax. 
Furthermore,  it  will  reduce  distortions  of  competition  between  mineral  oils  and  the  other 
energy products that have not been subject to Community tax legislation until now. Finally, it 
will  increase  the  incentive  to  use  energy  more  efficiently,  so  as  to  reduce  dependency  on 
imported energy and cut carbon dioxide emissions in the context of the Kyoto Protocol. 

4. 

TRANSITIONAL ARRANGEMENTS FOR CYPRUS 

According  to  the  letter  of  11  February  2004,  Cyprus  requests  transitional  arrangements 
regarding motor fuels only. 

Cyprus will apply the minimum rates applicable to motor fuels set by Directive 92/82/EEC at 
the  date  of  the  Accession.  For  1000  litres,  these  are  respectively  EUR  245  for  gas  oil  and 
kerosene, and 287 for unleaded petrol. 

However, as a result of implantation of Community "acquis", increases in the excise duty and 
in the VAT rate will significantly raise the final price of motor fuels. The price of unleaded 
petrol rose from £0,378 cents (€ 0,65) per litre on 21.10.1999 to currently £0,428 cents (€ 0,74), 
whereas  the  price  of  diesel,  which  is  widely  used  by  lower  middle  income  households  as  a 
significant proportion of them has diesel driven cars, increased from £0,146 cents (€ 0,25) per 
litre on 21.10.1999 to £0,36 cents (€ 0,62) currently. 

The  immediate  setting  of  the  new  minimum  tax  rates  would  aggravate  the  problems  of 
competitiveness  the  manufacturing  sector  is  confronted  with,  and  would  have  a  significant 
social  impact  on  the  expenses  of  households.  This  evolution  is  of  course  made  even  more 
difficult by the high world oil prices.  

Cyprus considers that the following transitional periods are needed: 

•  for unleaded petrol: until 1 January 2010 to reach the minimum rate of EUR 359; 

•  for  gas  oil  and  kerosene:  until  1  January  2008  to  reach  the  minimum  rate  of  

EUR 302 and until 1 January 2010 to reach the minimum rate of EUR 330. 

Assessment 

While taking into account the specific needs of Cyprus, the Commission assessed the requests 
against the same principles that were applied to the granting of transitional periods to present 
Member  States  and  to  other  Acceding  States  in  the  recent  proposal  of  the  Commission. 
According to such principles, the transitional measures should: 

•  be strictly time limited and, in principle, last no longer than 2012; 

•  be proportionate to the problem they seek to address; 

•  include, where  relevant, a  progressive  alignment  towards  the  Community  minimum  rates 

applicable. 

Moreover,  where  no  transitional  period  was  granted  in  the  Accession  Treaty,  the  minimum 
rates set by Directive 92/82/EEC have to be implemented as of 1 May 2004. 

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It should be  recalled that current Member States were granted  transitional periods  on motor 
fuels. Moreover, the requests  submitted by Cyprus are similar  to those presented by several 
other Acceding States. The lengthiest transitional periods granted in the Directive regarding 
gas oil and unleaded petrol are respectively 1 January 2012 and 1 January 2010. The proposal 
of 28 January 2004 contains transitional arrangements which are even longer in some cases. 

According  to  estimates  made  by  the  Commission,  the  implementation  of  the  new  minimum 
rates  on  gas  oil  and  unleaded  petrol  would  lead  to  an  increase  of  the  general  price  index, 
which  would  be  higher  than  the  ones  expected  for  most  present  Member  States  enjoying  a 
transition period until 2012 and similar to the ones of acceding States. 

The Commission is of the view that the Cyprus request is proportionate. 

The  Commission  concludes  that  Cyprus  should  be  authorised  to  apply  a  transitional  period 
until 1 January  2008 to adjust its national level of taxation on gas oil and kerosene used as 
propellant to the new minimum level of EUR 302 per 1000 l and until 1 January 2010 to reach 
EUR 330.  

Cyprus should also be authorised to apply a transitional period until 1 January 2010 to adjust 
its national level of taxation on unleaded petrol used as propellant to the new minimum level 
of EUR 359 per 1000 l. 

5. 

CONCLUSION 

The proposed tax Directive puts forward reasoned and proportionate transitional arrangements 
in  favour  of  Cyprus.  It  should  be  dealt  with  as  quickly  as  possible  by  the  European 
Parliament, the Council and the European Economic and Social Committee, in order to avoid 
any legal vacuum at the time of enlargement. 

Finally,  the  Commission  recalls  the  obligations  resulting  from  the  application  of  Council 
regulation (EC) No 659/1999 of 22 March 1999 laying down detailed rules for the application 
of Article 88 (ex 93) of the EC Treaty5, and in particular the rules on existing aids and on new 
aids.  The  Commission  recommends  that  acceding  States  notify  the  Commission  of  possible 
State  aid  elements  in  these  tax  measures  under  the  interim  procedure  for  existing  aid  laid 
down in Annex IV, point 3 of the Accession Treaty. 

5 

OJ L 83, 27.3.1999, p. 1. 

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2004/0067 (CNS) 

Proposal for a 

COUNCIL DIRECTIVE 

amending Directive 2003/96/EC as regards the possibility for Cyprus  
to apply, in respect of energy products and electricity, temporary exemptions 
or reductions in the levels of taxation 

THE COUNCIL OF THE EUROPEAN UNION, 

Having  regard  to  the  Treaty  establishing  the  European  Community,  and  in  particular 
Article 93 thereof, 

Having regard to the proposal from the Commission6, 

Having regard to the opinion of the European Parliament7, 

Having regard to the opinion of the European Economic and Social Committee8, 

Whereas: 

(1) 

(2) 

Council  Directive  2003/96/EC  of  27  October  2003  restructuring  the  Community 
framework  for  the  taxation  of  energy  products  and  electricity9  replaced,  with  effect 
from  1  January  2004,  Council  Directive  92/81/EEC  of  19  October  1992  on  the 
harmonisation  of  the  structures  of  excise  duties  on  mineral  oils10  and  Council 
Directive 92/82/EEC of 19 October 1992 on the approximation of the rates of excise 
duties on mineral oils11. It defines the fiscal structures and the levels of taxation to be 
imposed on energy products and electricity. 

The minimum rates set by Directive 2003/96/EC are liable to create serious economic 
and social difficulties for certain Member States, among which Cyprus, in view of the 
comparatively  low  level  of  excise  duties  previously  applied,  the  ongoing  economic 
transition,  their  relatively  low  income  levels  and  their  limited  ability  to  offset  that 
additional tax burden by reducing other taxes. In particular the price increases brought 
about by application of the minimum rates set by Directive 2003/96/EC are likely to 
have adverse effect on their citizens and national economies, creating for instance an 
unbearable burden for small and medium-sized enterprises. 

(3) 

Cyprus  should  therefore  be  permitted,  on  a  temporary  basis,  to  apply  additional 
exemptions or reduced levels of taxation, where it will not be detrimental to the proper 

6 
7 
8 
9 
10 
11 

OJ C , , p. . 
OJ C , , p. . 
OJ C , , p. . 
OJ L 283, 31.10.2003, p. 51. 
OJ L 316, 31.10.1992, p. 12. Directive as amended by Directive 94/74/EC (OJ L 365, 31.12.1994, p. 46). 
OJ L 316, 31.10.1992, p. 19. Directive as amended by Directive 94/74/EC (OJ L 365, 31.12.1994, p. 46). 

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functioning of the internal market and will not result in the distortion of competition. 
Moreover, consistent with the principles in accordance with which transitional periods 
were  originally  granted  under  Directive  2003/96/EC,  any  such  measures  should  be 
designed  to  bring  about  a  progressive  alignment  with  the  applicable  Community 
minimum rates. 

(4) 

This Directive does not prejudice the outcome of any procedures relating to distortions 
of  the  operation  of  the  single  market  that  may  be  undertaken,  in  particular  under 
Articles  87  and  88  of  the  Treaty.  It  does  not  override  the  requirement  for  Member 
States to notify instances of potential State aid to the Commission under Article 88 of 
the Treaty.  

(5) 

The wording of Art. 30 of Directive 2003/96/EC should be clarified. 

(6) 

Directive 2003/96/EC should therefore be amended accordingly, 

HAS ADOPTED THIS DIRECTIVE: 

Article 1 

Directive 2003/96/EC is amended as follows: 

(1) 

The following Article 18a is inserted 

"Article 18a 

1. 

2. 

3. 

Notwithstanding  the  periods  set  out  in  paragraph  2  and  provided  that  this  does  not 
significantly  distort  competition,  Member  States  with  difficulties  in  implementing 
the  new  minimum  levels  of  taxation  shall  be  allowed  a  transitional  period  until  1 
January 2007, particularly in order to avoid jeopardising price stability. 

The  Republic  of  Cyprus  may  apply  a  transitional  period  until  1  January  2008  to 
adjust its national level of taxation on gas oil and kerosene used as propellant to the 
new minimum level of EUR 302 per 1000 l and until 1 January 2010 to reach EUR 
330. However, the level of taxation on gas oil and kerosene used as propellant shall 
be not less than EUR 245 per 1000 l as from 1 May 2004. 

The  Republic  of  Cyprus  may  apply  a  transitional  period  until  1  January  2010  to 
adjust its national level of taxation on unleaded petrol used as propellant to the new 
minimum level of EUR 359 per 1000 l. However, the level of taxation on unleaded 
petrol shall be not less than EUR 287 per 1000 l as from 1 May 2004. 

Within the transitional periods established, Member States shall progressively reduce 
their respective gaps with respect to the new minimum levels of taxation. However, 
where  the  difference  between  the  national  level  and  the  minimum  level  does  not 
exceed 3% of that minimum level, the Member State concerned may wait until the 
end of the period to adjust its national level." 

(2) 

In Article 30 the following paragraph is added: 

"References to the repealed Directives shall be construed as references to this Directive." 

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Article 2 

1. 

Member  States  shall  bring  into  force  the  laws,  regulations  and  administrative 
provisions necessary to comply with this Directive by 2 May 2004 at the latest. They 
shall  forthwith  communicate  to  the  Commission  the  text  of  those  provisions  and  a 
correlation table between those provisions and this Directive. 

When  Member  States  adopt  those  provisions,  they  shall  contain  a  reference  to  this 
Directive or  be  accompanied  by  such  a  reference  on  the  occasion  of  their  official 
publication. Member States shall determine how such reference is to be made. 

2. 

Member States shall communicate to the Commission the text of the main provisions 
of national law which they adopt in the field covered by this Directive. 

This Directive shall enter into force on 1 May 2004. 

Article 3 

Article 4 

This Directive is addressed to the Member States.  

Done at Brussels, […] 

For the Council 
The President 
[…] 

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