2006/240/EC: Commission Decision of  16 November 2004  on aid granted by Germany to grain brandy distilleries  (notified under document number C(2004) 3953)   (Text with EEA relevance)
Date: 2004-11-16
Institutions: European Commission
Subjects: Germany, State aid, agricultural production, competition, control of State aid, production aid, spirits

L 88/50

EN

Official Journal of the European Union

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COMMISSION DECISION

of 16 November 2004

on aid granted by Germany to grain brandy distilleries

(notified under document number C(2004) 3953)

(Only the German text is authentic)

(Text with EEA relevance)

(2006/240/EC)

THE COMMISSION OF THE EUROPEAN COMMUNITIES,

(3)

Having regard to the Treaty
establishing the European
Community, and in particular the first subparagraph of Article
88(2) thereof,

Having regard to the Agreement on the European Economic
Area, and in particular Article 62(1)(a) thereof,

Having called on interested parties to submit their comments
pursuant to the provisions cited above and having regard to
their comments (1),

Whereas:

(1)

(2)

I. PROCEDURE

are members

six German
By letter dated 22 November 2000,
the
of
industrial
producers which
Federation of
Industrial Grain Distilleries submitted a
complaint to the Commission about the amendment of
Germany's Spirits Monopoly Law of 2 May 1976 by the
Budget Consolidation Law (‘HsanG’) of 22 December
1999 (2).

The complainants wanted it to be established that by
amending the Spirits Monopoly Law (3)
the German
legislator had introduced a scheme which infringes
Article 87 of the EC Treaty: it treats industrial and agri-
cultural grain distilleries - which up to then had been
equally entitled to aid - unfairly, since only the agri-
cultural producers would still be eligible for aid. They
claim that the new scheme gives the agricultural grain
brandy distilleries an indisputable advantage in the form
of aid that is incompatible with the Community compe-
tition rules.

(1) OJ C 269, 8.11.2003, p. 2.
(2) Bundesgesetzblatt Jahrgang 1999 Teil I Nr. 58, published in Bonn
on 28 December 1999. The Budget Consolidation Law introduced a
general reform of the German spirits monopoly. It came into force
on 1 October 2000.

(3) Branntweinmonopolgesetz of 2 May 1976.

The Commission first asked Germany for further infor-
mation about the criticised amendments on 3 January
2001. Germany replied by letter dated 14 February to
the effect that the aid measures in question had already
been notified to the Commission in 1976 and that the
new Law merely served to improve
existing
mechanism. On 16 March the Commission addressed a
further set of questions to Germany, which then asked
for an extension of the time limit; this was granted by
the Commission by letter dated 9 April.

the

On 24 April Germany's reply reached the Commission,
which on 19 November again communicated its initial
conclusions and comments. By letter dated 19 December
Germany confirmed its explanations of 14 February and
gave a renewed assurance that
the aid in question
complied with Community law.

By letter dated 22 February 2002 the Commission
requested Germany, under Article 17(2) of Council Regu-
lation (EC) No 659/1999 of 22 March 1999 laying down
detailed rules for the application of Article 93 of the EC
Treaty (4), to comment and submit appropriate proposals
on how the legislation on aid for grain distilleries could
be made consistent with Article 87(1) of the EC Treaty.
On 19 March Germany informed the Commission in
writing that it regarded such measures as unnecessary,
because
the Commission's
conclusions. This applied in particular to the conclusion
that grain brandy was an industrial not an agricultural
product.

could not

endorse

it

By decision of 19 June 2002 the Commission proposed a
number of appropriate measures to Germany for revising
the German Law on Aid to Grain Distilleries. By letters
dated 19 and 23 July Germany
the
Commission that it was rejecting the proposal and was
therefore not prepared to carry out
the appropriate
measures within the time limits set.

informed

(4)

(5)

(6)

(4) OJ L 83, 27.3.1999, p. 1, as amended by the 2003 Act of

Accession.

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L 88/51

(7)

Under Article 19 of Regulation (EC) No 659/1999 the
Commission therefore decided on 16 October 2002 to
initiate a formal investigation procedure in respect of the
aid measures concerned. The decision was published on
11 September
the European
Union (5), all
interested parties being invited to submit
comments on the measures in question.

in the Official

Journal of

the Law of 2 May 1976 (8). The new Law of 2 May 1976
on the Spirits Monopoly abolished the price support
policy resulting from the territorial protective measures,
which infringed Article 31 EC (ex Article 37), and repla-
ced them with a price compensation mechanism.

(8)

Germany commented on the initiation of the procedure
on 12 November.

(9)

The Commission received a total of 54 submissions from
third parties,
including a petition with some 2 000
signatures. These were forwarded to Germany on 7
February 2003, with a request for comments. On 26
February Germany asked the Commission to extend the
time limit
its reply, which was granted on 27
February. Germany's reply was finally received in the
Commission on 19 March.

for

(now Article 88(3)) of

(14) On 9 April 1976 Germany notified to the Commission
the reformed Spirits Monopoly Law (9) under Article
93(3)
the EC Treaty read in
conjunction with Article 4 of Council Regulation No
26 of 4 April 1962 applying certain rules of competition
to production of and trade in agricultural products (10).
Article 4 of the said Regulation states: ‘The provisions of
Article 93(1) and of the first sentence of Article 93(3) of
the Treaty shall apply to aids granted for production of
or trade in the products listed in Annex II to the Treaty’
[now and in what
the EC Treaty,
follows Annex I of
Commission italics] (11). Consequently,
the Member
States have a simple duty to inform, without an author-
isation by the Commission being necessary.

(10) On 5 June a meeting took place at Germany's request;
Germany
the
a
Commission on 4 June; this was followed by a further
letter on 2 July.

preparatory

submitted

letter

to

(11)

complainants

to the
commented
The
Commission on 13 August prior to a meeting which
took place at their request on 29 August.

in writing

(12) On 5 March 2004 the Commission forwarded the
letter of 13 August 2003 to Germany.

complainants'
Germany replied to this by letter dated 5 April.

(15)

In its letter of notification, Germany pointed out to the
Commission that it would continue to meet its legal
obligation to buy up the production of domestic spirits
manufacturers at a cost covering price.

(16)

In the 1976 notification, no distinction was made by
type of product,
i.e. between neutral alcohol and
aromatic alcohol such as grain brandy. The Commission
did not comment at that time on the wording of the
notification.

II. DESCRIPTION OF THE SCHEME

(17)

A. The German spirits monopoly and its devel-
opment

(13)

The German spirits monopoly was introduced by the
Law of 8 April 1922 (6) and amended as a consequence
of decisions of the Court of
Justice of the European
Communities (inter alia Case 45/75 Rewe-Zentrale (7) by

(5) OJ C 308, 11.9.2002, p. 6.
(6) Reichsgesetzblatt I, pp. 335, 405.
(7) [1976] ECR 181 (para. 27). The Court held in particular that Article
37 (now Article 31) of the Treaty is infringed ‘if the charge imposed
on the imported product is different from that imposed on the
similar domestic product which is directly or indirectly covered by
the monopoly’.

Following the amendment of the statute in 1976, the
monopoly consisted in the buying-up and marketing of
alcohol by the Federal Spirits Board (‘BfB’, Bundesmono-
polverwaltung für Branntwein). The BfB buys the alcohol at
statutorily guaranteed prices, rectifies it (12) and sells it at
market prices. This does not include grain brandy.

(8) Gesetz zur Änderung des Gesetzes über das Branntweinmonopol,

Bundesgesetzblatt I N 50, 7 May 1976, p. 1145.

(9) The notification concerned all products covered by the monopoly,

including grain brandy.

(10) OJ 30, 20.04.1962, p. 62/993, as amended by Regulation No 49

(OJ 53, 1.7.1962, p. 62/1571).

(11) Annex II of the Treaty became Annex I with the entry into force of
the Treaty of Amsterdam. The contents remained unchanged,
however.

(12) Rectification: processing of alcohol by distillation, filtration, etc.

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(18)

In the case of grain brandy, Deutsche Kornbranntwein-
Vermarktung GmbH (‘DKV’, German Grain Brandy
Marketing) (13), founded on 14 June 1930, was given a
similar task to the BfB by the Law of 2 May 1976, but
only for the buying-up and marketing of grain brandy.
The 1976 Law granted DKV the exclusive right
to
purchase the bulk of domestic grain brandy production
at statutorily guaranteed prices which cover the costs (14)
of the producers, whether industrial or agricultural, and
to market the grain brandy at market prices, if necessary
after conversion and/or rectification. Up to the year
2000, over 80 % of
the grain brandy produced in
Germany was marketed by DKV, and the other 20 %
by the distilleries themselves (15).

(22)

(23)

(19)

in Article 82 of

In return for performing the statutory duty transferred to
it
the Spirits Monopoly Law, DKV
receives a consideration, which in the absence of a
market price is determined in accordance with the
Basic principles of pricing public contracts on a total
production cost basis (LSP).

In the HsanG, amendments were made to the monopoly
in order to reduce the aid. First of all, the group of
recipients was restricted and the mechanism for allo-
cating the aid partly revised. Following the entry into
the HsanG, only the agricultural distilleries
force of
qualify fully for the old scheme, since under Article
40(5) of the amended Spirits Monopoly Law the distil-
lation rights of
the
operating years 2000/2001 to 2005/2006 were fixed
at 50 % of the regular distillation rights (16). After the
transitional period up to 2005/2006 provided for in
the statute, only the agricultural distilleries are eligible
for aid.

the commercial distilleries

for

the monopoly at all after

The industrial distilleries, which under Article 58a of the
Spirits Monopoly Law as amended by the HSanG may no
the
longer be part of
2006/2007 operating year,
i.e. after 30 September
2006, may, however, already leave the monopoly volun-
tarily as from 2001. To offset the inevitable losses of the
industrial distilleries,
the legislator has provided that
receive
those who leave
compensatory payments. For this reason, many of the
industrial distilleries have opted to leave the monopoly
early.

the monopoly early will

(20)

(21)

The German grain brandy producers entitled to aid are
obliged to deliver to DKV quantities corresponding to
their distillation rights, which are determined annually
by the government agencies. They may also produce a
larger quantity of alcohol, but without a price guarantee.
The agricultural distilleries (in contrast to the commercial
for obvious reasons) have a statutory duty to
ones,
process the materials (grain) which they produce them-
selves and to use the by-products of distillation in their
farming operations, e.g. feeding the stillage to cattle and
using the slurry as fertiliser.

(24) On grounds of equal treatment, agricultural distilleries
too may apply under the Law to leave the monopoly,
in which case they receive the same compensatory
payments as the industrial distilleries.

(25) DKV will carry out the task transferred to it by the Law
of 2 May 1976 up to 30 September 2006; thereafter the
BfB could take over its role.

Some distilleries/producers, however, also exploit and
market all or part of
their production themselves,
without making use of DKV. Where this is the case,
they receive from DKV, as part of the distillation rights
the rectification,
the equivalent of
granted to them,
storage and marketing costs which DKV has saved.
These producers,
therefore, are placed on an equal
financial footing with those who deliver their production
to DKV.

B. Description of the aid

Offsetting production costs

(26)

The dismantling of the spirits import monopoly in the
second half of the 1970s and the opening-up of the
increase in
market
German imports of spirits and at the same time to a
significant decline in the selling price of spirits, without
a noticeable fall in the manufacturers' prices.

led immediately to a significant

(13) The civil-law partnership DKV (GmbH), set up in 1930 by regu-
lation of the Reichsmonopolamt (now the Bundesmonopolbehörde
- Federal Monopolies Authority) and today coming under the
Ministry of Finance, holds the exclusive selling rights for grain
brandy.

(14) Until the entry into force of the Law of 28 December 1999.
(15) According to DKV, in the 2000/2001 operating year (i.e. one year
after
the HsanG) 24 %, and in the
2000/2001 operating year 40,6 %, of grain brandy output was
produced in the open market.

the entry into force of

(27)

The monopoly adapted (through DKV and the BfB) to
the new market conditions and lowered its own selling
prices to a competitive level. Thus the selling price of
alcohol declined from an average of DEM 333/hl
in
1976 to DEM 115/hl in 1999/2000.

(16) The operating year starts on 1 October of each year and ends on

30 September of the following year.

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(28)

For 1999/2000, the statutory purchase price which DKV
had to pay the grain distilleries was DEM 263 per hl
alcohol
(compared with DEM 296/hl paid by the BfB
to producers of other spirit). The purchase price is
calculated in such a way as to cover the producers'
costs. The reference costs are the average production
costs of a conscientious producer per hectolitre of
alcohol. In the same period, the selling price for grain
brandy through DKV was DEM 157/hl alcohol (as against
DEM 93/hl for neutral alcohol).

(33)

Funding the aid

The deficit
from the difference between the purchase
price and the sale of the products at the market price
in Germany is covered from Federal budget resources. To
a
duty was
offset
consumption tax which is levied on both domestic and
imported alcohol.

raised. This

alcohol

this,

is

(29)

The compensation system is thus clearly intended to
soften the impact of a shortfall on affecting the spirits
distribution monopoly
and hence DKV as well.
According to Germany, the subsidies paid to the grain
distilleries
the period 1 October 1999 to 30
September 2000 amounted to DEM 36,6 million (EUR
18,7 million).

for

M a r k e t

i n f i g u r e s

(34) At the end of the 1999/2000 operating year (before the
Law was introduced) there were 68 industrial and 409
total of
agricultural distilleries, which produced a
253 000 hectolitres of grain brandy. At 1 October
2001,
in the wake of the reform, there were only 11
industrial distilleries still operating in the market, with a
total production of 5 000 hectolitres. The number of
agricultural distilleries had fallen to 340, with a total
production of 142 000 hectolitres.

(30)

The difference between the purchase price and the selling
price in the market (market price) clearly constitutes an
aid. This is not disputed by Germany.

Compensatory amounts in the event of early withdrawal from
the monopoly

(35)

The 57 industrial distilleries that had left the monopoly
early had received compensatory amounts totalling EUR
5,9 million at the end of the 2001/2002 operating year,
the six agricultural ones EUR 0,6 million. The 47 distil-
leries that market their output themselves (total of 5 400
hl grain brandy) received EUR 315 000 in aid for this
purpose. Lastly, in the 2001/2002 operating year, DKV
received a grant of EUR 6,6 million.

(31)

The system provided for in Article 58a of the Spirits
Monopoly Law will make it easier for the grain distilleries
to leave the monopoly. As already explained above (see
paragraph 22), distilleries which are prepared to leave the
in return for leaving of their
monopoly early receive,
own free will and instead of
the operating aid for
offsetting production costs, degressive compensatory
amounts up to September 2006, which in each case
are paid out in the first four months of an operating
year. The
enable producers
which would like to do so to continue operating in the
‘open’
the
monopoly (17). This is therefore a deflection of existing
aid, which can be used by the producers in whatever way
they want.

compensatory amounts

brandy market

leaving

despite

grain

C. Comments from third parties

(36) After publication of the decision to initiate the procedure,
the Commission received 54 replies from third parties,
including natural persons, undertakings, federations and
trade associations. The overwhelming majority (47) reject
the measures proposed by the Commission, which form
the starting point for the procedure; three replies were
positive in part, and four wholly so.

(32)

It will be noted that virtually all
agricultural distilleries have chosen this alternative.

industrial and some

(37)

(17) The ‘open’ grain brandy market constituted 40,8 % of the market in

the 2001/2002 operating year.

The four positive replies were submitted by represen-
tatives of the spirits industry. They even consider that
the Commission did not go far enough in its decision
to initiate the procedure and that the German spirits
monopoly must be thoroughly reformed.

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Agricultural producers

(38) All 35 agricultural distilleries reject

the Commission's
position. Most are small family farms. The Commission's
view that grain brandy is an industrial product
is
In their opinion it is clearly an agri-
disputed by all.
‘grain
cultural product. Also criticised is the concept
brandy’ used by the Commission: a more appropriate
name for the product delivered to DKV would be ‘raw
alcohol’ or ‘grain raw alcohol’. The alcohol delivered to
DKV is not a drinkable product but must be processed
further or rectified. Some also argue that the situation of
the agricultural producers cannot be compared with that
of the industrial firms, because they are not subject to the
same constraints. In this respect, a detailed description is
given of the different stages of grain brandy production,
which is based on a recycling system (grain cultivation,
distillation, use of the stillage as cattle feed, use of the
slurry as fertiliser for grain cultivation)
that requires
strictly ecological methods. The agricultural distilleries
therefore consider that in their case the provisions of
the EC Treaty relating to agricultural products must
continue to apply and that they would inevitably be at
a disadvantage compared with agricultural firms which
deliver their alcohol to the BfB if,
instead, the stricter
competition rules in the EC Treaty were to apply to
them. The end of the monopoly from 1 January 2004
would certainly be disastrous for them, since many of
them had made investments which they would then no
longer
the
In addition,
distillery was the centre of the farm and if it ceased to
operate, the whole business would fold. A trade asso-
ciation representing the agricultural distilleries which
their own grain brandy also classifies grain
market
brandy as an agricultural product and thinks that the
Commission should accept
this. Lastly, several replies
argue that the aid measures could not distort competition
trade between Member States, since grain
and affect
brandy is an alcohol that can be produced only in the
German language area.

in some cases,

see mature.

The complainant and the industrial distilleries

(39)

set

and

They

industrial

distilleries.

The Association of Industrial Grain Distilleries criticises
the initiation of the procedure because it is proposed to
do away with all aid of whatever type, both for agri-
cultural
the
procedure in motion but regret that the Commission
should call
into question the compensatory amounts
for industrial distilleries, which were conceived as an
incentive for leaving the monopoly early. In the complai-
nant's
amounts did not
compensatory
constitute state aid within the meaning of Article 87(1).
Rather, they are the counterpart of the distillation rights,
to the agricultural distilleries they
which in contrast
would have to surrender. The authorisation of
the
compensatory amounts provided for in the HsanG was
desirable simply in order to protect legitimate expec-
tations and was also essential for giving the distilleries

view,

the

concerned the opportunity, until the expiry of the transi-
tional period, to convert their operations under econom-
ically acceptable conditions, especially as the amounts
were not anything like as large as the losses caused by
the new Law. Moreover, trade between Member States
was not restricted by the payments, since there was no
distortion of competition: all members of the trade asso-
ciation had ceased production of grain brandy, since it
was impossible to survive in a subsidised market without
receiving grants oneself. The complainant, however,
maintains its point of view that the aid for the agri-
cultural distilleries is unlawful because of the unequal
treatment. Three
industrial distilleries have bluntly
called for the provisions of the HsanG on the payment
of compensatory amounts as compensation for early
departure from the monopoly to be kept.

Other comments

has

association which

spirit drinks (18) or

The other comments, including those of an expert who
claims to have been involved in the preparatory work on
Council Regulation (EEC) No 1576/89 of 29 May 1989
laying down general rules on the definition, description
and presentation of
those of a
consumer
collected 2 000
signatures, categorically reject the position taken by the
Commission in initiating the procedure, mostly using the
same arguments and contending in particular that grain
brandy must continue to be classified as an agricultural
product and that the Commission should not call into
question the traditional methods of manufacturing that
product. DKV claims that if the Commission, in its final
should insist on the appropriate measures
decision,
it should observe the principle of
which it proposes,
proportionality when setting the time limit
for their
implementation and extend the transitional deadline
the undertakings
beyond 1 January 2004 to give
concerned the opportunity to convert their operations.

(40)

D. Germany's comments

(41) Germany does not dispute that the system of refunding
the manufacturing costs by DKV has the character of
operating aid. It considers, however, that grain brandy
should continue to be caught by the provisions of the
EC Treaty applying to agricultural products and should
not be treated by the Commission as an industrial
product. It does not share the Commission's view at all
that the grain distillates produced under the monopoly
are not an agricultural product that comes under the
umbrella concept of ethyl alcohol but a spirituous

(18) OJ L 60, 12.6.1989, p. 1; as last amended by Regulation (EC)
No 1882/2003 of the European Parliament and of the Council (OJ
L 284, 31.10 2003, p. 1).

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beverage designated as a spirit and therefore an industrial
product. It bases its position on the fact that the wording
of Annex I of
the
substance of an EC Treaty text cannot be called into
question by a provision of secondary legislation, as it
describes Regulation (EEC) No 1576/89.

the EC Treaty is clear and that

against the industrial grain distilleries, since it is limited
to reorganising the monopoly through a minimal
reduction of the number of aid recipients and with a
transitional period of six years and appropriate financial
compensation, which is paid to industrial and agricultural
distilleries alike.

(42)

In support of its arguments, Germany submits that by
confirming the non-discriminatory character of alcohol
duty in several judgments (inter alia Case 91/78 Hansen
v Hauptzollamt Flensburg (19) and Case 253/83 Sektkellerei
C.A Kupferberg v Hauptzollamt Mainz) (20) the Court of
Justice has acknowledged the compatibility of the duty
with the provisions of Articles 37 and 95 (now Articles
31 and 90) (21) and hence indirectly with Articles 87 and
88 of the EC Treaty.

(43) With regard to the compensatory amounts for distilleries
which have decided to leave the monopoly early,
Germany explains that these are necessary incentives on
account of the long-standing involvement of the distil-
leries in the spirits monopoly, having first made it clear
that, contrary to what the complainant maintains, the
distillation rights are not an asset. Moreover,
it was
also possible for the agricultural distilleries, for reasons
of equal treatment, to leave the monopoly, and under the
same conditions as the industrial distilleries.

(46)

(47)

(44) Germany points out

leaving

amounts

in return for

that – should the Commission
maintain its assessment – in the case of both operating
aid for the distilleries remaining in the monopoly and
compensatory
the
monopoly early, a transitional period of several years is
essential on account of the traditional
involvement of
grain brandy producers in the spirits monopoly and
the associated protection of legitimate expectations. The
distilleries, whether industrial or part of a farm, needed
the time to adjust their production structures to the open
market or to convert their operations to other types of
production. Germany has therefore proposed a transi-
tional time limit of 30 September 2006. It has given
the Commission concrete reasons why the original time
limit of 1 January 2004 laid down by the Commission in
the appropriate measures should be extended to at least
the 2005/2006 operating year. Any other decision would
result in the closure of numerous industrial and agri-
cultural distilleries and the loss of many jobs.

III. LEGAL ASSESSMENT

A. Applicability of the competition rules

Grain brandy not covered by Annex I to the EC Treaty

It was explained above that
the processing of grain
brandy was organised separately from the other alcohol
products of agricultural origin covered by the monopoly
(see paragraphs 16 to 24). In 1930, an agency with its
own legal personality, DKV, was set up specifically for
this product under the spirits monopoly. With the Law
of 2 May 1976, Germany again confirmed the special
treatment of grain brandy by maintaining the coexistence
of two different market organisation agencies – the BfB
and DKV.

The majority of the basic alcohol products (distillates)
delivered to the BfB are plainly intended for the manu-
facture of neutral alcohol which is not ready for use,
while the distillates transferred to DKV (described by
Germany as ‘grain fine distillate’) are distinguished by
their
suited for
human consumption

aromatic properties

and therefore

(48)

The main reasons for this distinction are the condition in
which the basic production of the distilleries is delivered
to the two marketing organisations, and the quality of
the marketed product after conversion and/or rectifi-
cation by the two agencies.

(49)

(inter alia fruit-,
The BfB receives mainly raw alcohol
potato-, molasses-
it
cereals-based)
generally after rectification and/or conversion as neutral
alcohol.

sells

and

or

(45) Germany disputes the complainant's contention that the
HSanG of 22 December 1999 has led to discrimination

(19) [1979] ECR 935.
(20) [1985] ECR 157.
(21) Article 90 (ex Article 95) states:

‘No Member State shall impose,
directly or indirectly, on the products of other Member States any
internal taxation of any kind in excess of that imposed directly or
indirectly on similar domestic products. … no Member State shall
impose on the products of other Member States any internal
taxation of such a nature as to afford indirect protection to other
products.’

(50) DKV receives a distillate – “grain fine distillate” – which is
already regarded as a spirit drink within the meaning of
Regulation (EEC) No 1576/89. The rectification of the
distillate carried out by DKV consists in particular in
standardising the alcohol content of
the end product
(32 % in the case of the product known as ‘Korn’, and
37,5 % in the case of ‘Kornbrand’).

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European

establishing
refers

(51) Annex I to the Treaty as amended by Council Regulation
No 7a adding certain products to the list in Annex II to
the
the
Economic
Treaty
to ‘Ethyl
Community (22)
alcohol or neutral
spirits, whether or not denatured, of any strength,
obtained from agricultural products listed in Annex I
to the Treaty, excluding liqueurs and other spirituous
beverages
preparations
(known as “concentrated extracts”) for the manufacture
of beverages’. This text can be interpreted with the aid of
headings ex 22.08 and 22.09 (now 22.07 and 22.08) of
the Harmonised System Tariff Nomenclature, where
undenatured ethyl alcohol, spirits,
liqueurs and other
spirituous beverages are defined.

compound

alcoholic

and

(52)

(53)

In the Explanatory Notes to the Harmonised System,
spirits, which are thus not covered by Annex I, are
‘Spirits produced by distilling wine,
defined as follows:
cider or other fermented beverages or fermented grain or
other vegetable products, without adding flavouring; they
the secondary constituents
retain, wholly or partly,
(esters, aldehydes, acids, higher alcohols, etc.) which
give the spirits their peculiar individual
flavours and
aromas.’

The heading also includes ‘undenatured ethyl alcohol
with an alcoholic strength by volume of
less than
80 % …’. Concerning this product,
the Explanatory
Notes state ‘… contrary to those at (A) [e.g. spirits],
these
absence of
characterised by
secondary constitutents giving a flavour or aroma,
whether
for
industrial purposes’.

intended for human consumption or

spirits

the

are

(54) Grain brandy is therefore a spirit which is characterised
by the presence of aromatic components, and hence
cannot be regarded as ethyl alcohol. This
is also
supported by point (C)(4) of the explanatory notes to
(C)(2)), which
heading ex 22.09 (now 22.08, point
stresses that
this heading, as well as ethyl alcohol,
covers ‘Whiskies and other spirits obtained by distilling
fermented mash of cereal grains (barley, oats, rye, wheat,
corn, etc.)’.

(55)

In its replies to the Commission, Germany confuses grain
alcohol (Kornalkohol), which under the above-mentioned
conditions (see paragraph 53) can be regarded as ethyl
alcohol, with the spirit drink grain brandy (Korn-
branntwein).
the Spirits
Judging by the wording of
Monopoly Law as amended by the HsanG of 22
December 1999,
in fact
treated grain alcohol
and grain brandy differently,
precisely because they are different products.

the German legislator has

(22) OJ 7, 30.1.1961, p. 71/61.

(56)

The Commission, consequently, sticks to its view that
these are different products;
is used for
producing neutral alcohol, while the latter, which is the
subject of these proceedings, has components which give
it aroma and taste.

the former

(57) Article 1(1) of Regulation (EEC) No 1576/89 states that
the Regulation covers the definition, description and
presentation of spirit drinks.

(58) Article 1(4) of the said Regulation lists the different cate-
gories of spirit drinks. In subparagraph (c), ‘grain spirit’ is
defined as:

‘(1)
A spirit drink produced by the distillation of a
fermented mash of cereals and having organoleptic char-
acteristics derived from the raw materials used.

‘Grain spirit’ may be replaced by Korn or Kornbrand, for
the drink produced in Germany and in regions of the
the official
Community where German is one of
traditionally
this drink is
languages provided that
produced in these regions and if
is
obtained there without any additive:

the grain spirit

— either exclusively by the distillation of a fermented
mash of whole grains of wheat, barley, oats, rye or
buckwheat with all their component parts,

— or by the redistillation of a distillate obtained in

accordance with the first subparagraph.

(2)
For a grain spirit to be designated 'grain brandy', it
must have been obtained by distillation at less than 95 %
vol from a fermented mash of cereals, presenting orga-
noleptic features deriving from the raw materials used.’

(59)

In the present case, the grain brandy producers deliver to
DKV a product
(grain fine distillate) obtained in
accordance with the procedure described in Regulation
(EEC) No 1576/89 which,
is subsequently
rectified and/or transformed by DKV so that it can then
be marketed.

if necessary,

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spirit drinks

(60) Germany takes the view that the Commission should not
rely on this text, because it only establishes rules for the
sale of
in the interests of consumer
protection. The Commission does not dispute that such
is the purpose of the Regulation, but this by no means
prevents the text from being used to describe and define
grain brandy as a spirit drink, which as such is directly
subject to the competition rules. It therefore considers,
without wanting to give a definitive ruling on the matter,
taken from secondary legislation
that
supports its view as regards the classification of
the
product in question.

this passage

(61)

there

its communications

In one of
to the Commission,
Germany points out that the wording of Annex I to
the EC Treaty varies according to the language version.
Thus the word ‘spirits (Branntwein)’
is missing in the
English and Dutch versions, where
is only
‘liqueurs’ and ‘spirituous beverages’. The
mention of
Commission would comment
that the
German and other language versions are clear in this
connection and that ‘spirits’ are undoubtedly mentioned
in them. The language versions which, like the English
and the Dutch, do not specifically exclude spirits must be
interpreted and applied in the light of the other language
versions and can only be understood in such a way that
spirits are among the alcoholic beverages which are also
excluded from the scope of Annex I.

in this respect

(64)

The Commission therefore concludes that grain brandy is
a spirit drink which is excluded from the scope of Annex
I
to the
Community competition rules.

to the EC Treaty and is hence subject

B. The measures in question should be regarded as
existing aid within the meaning of Article 87(1) of
the EC Treaty

(65)

The Commission has shown that grain brandy is an
industrial product to which Articles 87 and 88 of the
EC Treaty apply.

(66) Under Article 87(1),

‘save as otherwise provided in this
Treaty, any aid granted by a Member State or through
State resources in any form whatsoever which distorts or
threatens to distort competition by favouring certain
undertakings or the production of certain goods shall,
in so far as it affects trade between Member States, be
incompatible with the common market’.

Covering the production costs

(67)

(62) As part of

the operation and development of

the
the Council
common market in agricultural products,
on 8 April 2003 adopted Council Regulation (EC) No
670/2003 laying down specific measures concerning the
market in ethyl alcohol of agricultural origin (23). The
Regulation creates for the first time a common organi-
sation of the market for alcohol of agricultural origin.

(63)

the procedure

decision to introduce

In its
the
Commission used some points from the Regulation,
which was still in the preparation stage at the time, to
support its arguments. It believes it is still appropriate to
refer to the preparatory work on this legal instrument as
well as to the final version of the Regulation in order to
support, where necessary, its analysis that grain brandy is
an industrial product. Thus, in a first draft of Article 1,
spirit drinks within the meaning of Regulation (EEC) No
1576/89 were explicitly excluded from the scope of the
Regulation. In the final version of the Regulation, the
defined with
agricultural
reference
In the
Combined Nomenclature headings mentioned in Article
1 to which the Regulation applies, spirits in the form of
grain brandy are not listed, but only undenatured and
denatured ethyl alcohol and denatured other spirits.

products
to Annex I

to the EC Treaty.

concerned

are

(23) OJ L 97, 15.4.2003, p. 9.

The measures in question confer an advantage on the
producers of grain brandy, since they ensure that they
will cover their manufacturing costs in the context of the
distillation rights granted to them irrespective of the price
at which the product finally comes onto the German
market.
It will be noted that grain brandy was
purchased by DKV in the 1999/2000 operating period
at a price of DEM 263/hl, to be marketed subsequently at
a price of DEM 157/hl, which constitutes aid for the
period amounting to DEM 36,6 million (EUR 18,7
million). Thus German grain brandy producers can sell
their production on financial terms which are substan-
tially more favourable than those that would apply if
they had to sell their production direct under normal
market
considerable
subsidies of the monopoly.

conditions – i.e. without

the

(68)

In those cases where DKV is not itself involved in the
grain brandy manufacturing process,
the producers
concerned receive an indemnity in accordance with
their distillation rights for the grain brandy rectification,
marketing, storage, etc. costs which DKV has saved.

(69) As a result of this aid, the German producers can sell that
part of the grain brandy production not covered by the
distillation rights, which they have to market directly, at
prices which they could not demand if, thanks to the
monopoly, they did not receive an excessive purchasing
price for the remaining production delivered to DKV.

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(70)

This preferential treatment affects the current manufac-
turing and marketing costs,
i.e. the operating costs, of
each undertaking.

(71)

(72)

(73)

(74)

Compensatory amounts

The producers also receive an advantage from the
compensatory amounts, which are granted to them
instead of their manufacturing costs being refunded if
they leave the monopoly early, so that
if necessary
they can survive in the ‘open’ grain brandy market. The
funds granted replace the subsidies for manufacturing
and marketing a particular product, but are by nature
akin to subsidies. It is immaterial that the compensatory
measures can also be used for purposes other than
remaining in the ‘open’ grain brandy market, e.g.
for
closing or restructuring distilleries.

under

spirits monopoly,

to reduce the
The HsanG, which is supposed overall
subsidies
is plainly
the
intended to create balanced transitional arrangements
which will meet the needs of all producers in accordance
with their respective particularities and objectives. It will
be noted in this respect that not all producers are subject
to the same constraints: the agricultural producers, for
example, are obliged by law to use the ecological
principle of recycling in their production.

compensatory

The
to
amounts
investments and hence concern the day-to-day running
of the assisted distilleries.

linked

not

are

The measures are financed from state resources, whether
in the form of subsidies for manufacturing costs or of
compensatory amounts. The shortfall from the difference
between the purchase price and the sale of the products
at market price in Germany is met from Federal budget
resources; this also applies to the compensatory amounts
for producers which leave the monopoly early.

(75)

The aim of the measures is to support grain brandy
production. They have the following selective character.

(76)

The measures quite clearly distort competition in the
common market and restrict
trade between Member
States, since German producers compete with those
from other Member States, who would like perhaps to
sell the same alcohol on the German market. As various
third parties have noted, the designation ‘grain brandy’
may be used, pursuant to the already cited Regulation
(EEC) No 1576/89, ‘for the drink produced in Germany
and in regions of the Community where German is one of the
this drink is tradi-
official
tionally produced in these regions …’. Moreover, grain

languages (24) provided that

(24) Commission italics.

spirits and spirituous
brandy competes with other
beverages from other Member States. The fact that the
Court of
Justice held in Hansen and Sektkellerei C.A.
Kupferberg that Articles 95 and 37 of the EEC Treaty
must be interpreted as not precluding the de facto
reduction made in the selling price of spirit sold by the
federal monopoly administration in a given period
‘provided that the rate of taxation actually applied to
imported products during that period did not exceed
taxation actually levied on corresponding
the rate of
domestic products’ does not anticipate the assessment
of the state aid by the Commission.

(77)

There is no doubt therefore that the measures in question
are likely to affect trade between Member States.

(78)

Consequently, the measures in question constitute state
aid within the meaning of Article 87(1) of the EC Treaty.
Since the aid is meant to cover the day-to-day running
costs of the undertakings concerned, it is operating aid.

and interested third parties,

(79) After examining the documents submitted by Germany,
the
the
complainants
Commission finds that
the aim in the HsanG of 22
December 1999 was to reform the spirit monopoly as
amended by the Law of 2 May 1976 so as generally to
reduce the subsidies for the manufacture of grain brandy.
The Commission also notes that Germany notified the
measures arising out of the 1976 Law in April of that
year on the basis of the provisions applying to agri-
cultural products and that the notification prompted no
further comments at the time.

(80)

(81)

take

Pursuant to Article 88(1) of the EC Treaty and Article 18
of Regulation (EC) No 659/1999,
the Commission
recommended by decision of 19 June 2002 that
it had
appropriate measures,
Germany
reached the conclusion that grain brandy should be
regarded as an industrial product and that the measures
concerned constitute aid which is no longer compatible
with the common market; however, Germany objected to
this.

after

The state aid resulting from the Spirits Monopoly Law,
including the aid measures for grain brandy under the
Law of 2 May 1976 had been duly notified by Germany
without the Commission expressing reservations at the
time about its compatibility with the Community compe-
tition rules. Germany informed the Commission at that
time that it was proposing to implement the measures.
Consequently,
the aid is existing state aid within the
meaning of Article 1(b)(iii) of Regulation (EC) No
659/1999.

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L 88/59

(82)

(83)

in its decision of 19 June 2002 on appropriate
the
did
resulting from the Law of 22 December

the Commission

classify

not

Thus,
measures,
measures
1999 as new aid.

It changes nothing at

The HsanG of 22 December 1999 is actually intended to
reduce the number of recipients and the level of the
the heart of
subsidies granted.
the system introduced by the Law of 2 May 1976,
under which the producers' costs are covered irrespective
of the market price of grain brandy. The same applies to
the compensatory amounts, which are granted in return
for leaving the monopoly early and replace the subsidies
for a certain period.

(84)

The HsanG 1999, therefore, did not need to be notified
to the Commission before its entry into force.

(85)

This view accords with the decision of the Court of
Justice in Case C-44/93 Namur-Les assurances du crédit
SA (25). Here, a public undertaking had decided to
expand its activity so that the public aid it had been
granted under legislation predating entry into force of
the Treaty would also benefit the expanded operations.
The Court held that it was impossible to argue that this
is a case of granting or altering aid, as envisaged in
Article 93(3), since the decision was taken without any
amendment of the aid scheme established by the legis-
lation.

(86) Accordingly, aid which is granted under an aid scheme
predating entry into force of the Treaty is not subject
either to the duty of prior notification or the ban on
implementation under Article 93(3), but must be kept
under constant review in accordance with paragraph 1
of the same Article.

‘A factor of
legal uncertainty would be introduced if
Member States were to be required to notify to the
Commission and submit for its preventive review not
only new aid or alterations of aid properly so-called
granted to an undertaking in receipt of existing aid but
also all measures which affect the activity of the under-
taking and which may have an impact on the functioning
of the common market or on competition.’

(87)

The Commission shares this assessment.

(88)

In the light of the above, the Commission initiated the
procedure provided for in Regulation (EC) No 659/1999.

(25) [1994] ECR I-3829.

(a) P r e p a r a t o r y m e a s u r e s

p u r s u a n t

t o

R e g u l a t i o n ( E C ) N o 6 5 9 / 1 9 9 9

(89) Article 17 of Regulation (EC) No 659/1999 reads, under
the heading ‘Cooperation pursuant to Article 93(1) of the
Treaty’:

‘1.
The Commission shall obtain from the Member
the
concerned all necessary information for
State
review,
in cooperation with the Member State, of
existing aid schemes pursuant to Article 93(1) of the
Treaty.

2. Where the Commission considers that an existing
aid scheme is not, or is no longer, compatible with the
common market,
inform the Member State
concerned of its preliminary view and give the Member
State concerned the opportunity to submit its comments
within a period of one month. …’.

shall

it

(90)

that

By letter dated 22 February 2002 the Commission duly
informed Germany that it had reached the conclusion,
after examining its replies and the facts submitted by the
the Community competition rules
complainants,
apply to the aid measures in question and that
the
special provisions on agricultural products cannot be
invoked, since grain brandy is an industrial product,
which as such does not fall within Annex I to the EC
Treaty.

(91) After the Commission had established that Germany's
measures in support of the grain distilleries constitute
existing aid whose compatibility with the provisions of
the EC Treaty is doubtful,
it requested Germany under
Article 17 of Regulation (EC) No 659/1999 to state its
views on this within one month of receiving the letter of
22 February 2002. Germany was also requested to
submit appropriate measures amending its monopoly
legislation to make it compatible with Article 87 of the
EC Treaty.

(92)

By letter dated 19 March 2002 Germany objected to the
Commission's assessment and again submitted that grain
brandy should be covered by the provisions applying to
agricultural products.

(b) P r o p o s a l o f a p p r o p r i a t e m e a s u r e s

(93) Article 18 of Regulation (EC) No 659/1999 states with

regard to appropriate measures:

‘Where the Commission, in the light of the information
submitted by the Member State pursuant to Article 17,
concludes that the existing aid scheme is not, or is no
it shall
longer, compatible with the common market,
appropriate
issue
measures to the Member State concerned. The recom-
(a) substantive
mendation may propose,
in particular:
introduction of
amendment of the aid scheme, or (b)
procedural
the aid
requirements, or
scheme.’

recommendation

(c) abolition of

proposing

a

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(94)

to Article 88(1) of

the EC Treaty read in
Pursuant
conjunction with Article 18 of Regulation (EC) No
659/1999,
the Commission recommended in the
decision of 19 June 2002 that Germany take appropriate
measures to reform the relevant provisions of German
grain brandy legislation (Law of 2 May 1976 and Law of
22 December 1999) as follows:

(a) agricultural and industrial distilleries may no longer
receive any operating aid in the form of subsidies for
maintaining statutorily guaranteed prices;

(b) they may no longer claim other aid of whatever kind
as compensation for any early departure from the
system;

(c)

the legislative amendments must ensue as soon as
possible after the start of the 2002/2003 operating
year and enter into force at the latest on 1 January
2004;

(d) Germany must

inform the Commission of

the
measures taken in a report to be submitted at the
latest at the end of the first quarter of 2003. A
second report on the actual
implementation of the
measures should be submitted to the Commission at
the latest by the end of November 2003.

C. Assessment of the case law cited by Germany as
justification for the aid measures

(95)

Justice has ruled many times on the
The Court of
compatibility of
statutory provisions on the
German spirits monopoly with certain provisions of the
EC Treaty (in particular in Hansen and Sektkellerei C.A.
Kupferberg, see paragraph 42).

the

(96) Germany invokes this case law in its replies to the
Commission and infers from it that the provisions of
the Spirits Monopoly Law of 2 May 1976 have already
been examined and confirmed by the Court. Conse-
quently, the Spirits Monopoly Law (as amended by the
Law of 22 December 1999) cannot be called into
question by the Commission, since the Court did not
object to it.

the tax provisions introduced by the German spirits
monopoly. The Court on this occasion gave its view
on the compatibility of the tax measures resulting from
the Spirits Monopoly Law with the EC Treaty.

(99)

In its judgment it limited itself to pointing out that ‘the
intervention of the Commission plays a large part in the
implementation of Articles 92 and 93 whilst Article 37
is intended to be directly applicable’, i.e. it confirmed that
the Commission is authorised by the EC Treaty to assess
the measures in question from the standpoint of the aid
rules.

(100) The Court explains, moreover, that while Articles 92 and
93 and Article 37 have the common objective of
from distorting the
preventing the Member States
conditions of competition within the common market
and creating a discrimination against the products or
trade of other Member States through ‘action by a state
‘the application of
monopoly and the granting of aids’,
those provisions presupposes distinct conditions peculiar
to the two kinds of state measure which they are
intended to govern’. Lastly,
the Court explained that
there was no need in the particular case to examine
how far Articles 92 and 93 were applicable to the
production of the agricultural products concerned and
to trade in them.

(101)

It cannot be inferred from this justification that the Court
considered that the aid provisions of the EC Treaty are
not applicable to the subsidies granted in the context of
the grain brandy monopoly.

(102) While Germany acknowledges that the Court did not
comment directly on the legality of the monopoly as
regards Articles 92 and 93,
it claims that there is no
doubt that the Court classified the product in question
as an agricultural product which may be subject to a
common organisation of the market.

(103) The Commission observes

that

the Court did not
comment on the state aid in question.
therefore
It
the Court's judgments which Germany
considers that
invokes in this case do not anticipate either the classifi-
cation of the product in question or the assessment of
the aid to German grain distilleries. The case law cited is
therefore not relevant in the present case.

(97)

is therefore appropriate to go into the operative

It
provisions of this case law in more detail.

D. Compatibility of the aid

(98)

In the cases cited in this context the Court was asked for
a preliminary ruling on the validity in the light of Articles
37 and 95 (now Articles 31 and 90) of the EC Treaty of

(104) Article 87(2) of the EC Treaty lists certain types of aid
that are compatible with the EC Treaty. Given the type
and composition of the aid, however, it is clear that the
exemptions in Article 87(2)(a), (b) and (c) do not apply in
the present case.

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(105) Article 87(3) lists the types of aid that may be regarded
as compatible with the common market. It is clear that
the scheme in question does not serve to promote
important projects of common European interest or to
remedy a serious disturbance in the economy of a
Member State or to promote culture and heritage conser-
vation within the meaning of the exemptions in Articles
87(3)(b) and (d).

(106) As regards the exemptions in Article 87(3)(a) and (c),
provided for in the interests of regional development, it
should be noted that the aid in question applies to all
regions of Germany without distinction. There is also no
doubt that the aid is not intended to promote measures
within the meaning of the exemption on facilitating the
development of
(Article
certain economic
87(3)(c)) in the fields of research and development, envir-
in
onmental
accordance with the relevant Community frameworks
or guidelines. Since no other reason concerning the
development of
can be
given, the aid in question should be regarded as incom-
patible with the common market.

certain economic activities

employment

protection,

activities

training

or

(107) The Commission considers, however, that there are quite
specific reasons for allowing the system practised in
Germany to be maintained for a certain transitional
period.

(108) After

the

the procedure,

all
circles
initiation of
concerned, with the exception of
the spirit drinks
industry, protested against the time limit proposed by
the Commission. Germany explained to the Commission
that a period of several years was essential, so that the
aid in question could be dismantled under acceptable
conditions without
the
producers concerned, who had thus far benefited from
the duly notified subsidy system, which the Commission
had not complained of in several decades.

threatening the existence of

(109) The Commission notes first of all that in grain brandy
production the operating year starts on 1 October and
ends on 30 September of the following year. It will take
account of
this in setting the time limit by which
Germany must have implemented the statutory reform.

(110) Germany has convincingly explained to the Commission
that the industrial and agricultural distilleries, which have
hitherto delivered the distillates manufactured under the
monopoly to DKV and would like in future to market
the grain brandy themselves under the new system, have
for
to make considerable investments. These include,
example, the purchasing of new distillation equipment
or the construction of new buildings and storage areas
(steel
equipment,
bottling plant, storage area for packaged goods, appli-
cation for building permits, etc.). Germany estimates

vats, wooden barrels,

laboratory

that a distillery with an annual production of 1 000 hl
grain alcohol must invest at least EUR 400 000 a year in
marketing that quantity of alcohol.

(111) Clearly,

feasible
the necessary restructurings are not
unless an additional period is granted in which the
existing financial aid, whether in the form of a refund
is
of production costs or of compensatory amounts,
maintained. This applies in particular to the small distil-
leries, which make up the overwhelming majority of the
undertakings and/or farms.

(112) The Commission accepts the justification for Germany's
request, since it can be shown that abruptly stopping aid
which has been granted for decades would threaten the
existence of most of the firms affected by the measures,
especially the agricultural distilleries. A transitional period
should therefore be provided which is determined in such
a way that the distilleries can adjust their production in
that period to the new situation.

(113) The Commission also notes that grain brandy competes
with other products that come under Annex I and receive
aid. Since the present case concerns operating aid,
however, the latter must be terminated within an appro-
priate period: in view of the above explanations, it would
probably be appropriate to preserve the scheme for a
further two and a half years approximately (until 30
September 2006)
in this respect. Thereafter Germany
must abolish the scheme and all its consequences.

(114) The Commission therefore determines as follows:

(a) agricultural and industrial distilleries may no longer
receive any operating aid in the form of subsidies for
maintaining statutorily guaranteed prices;

(b) they may no longer claim other aid of whatever kind
as compensation for any early departure from the
system;

(c)

the legislative amendments must ensue as soon as
possible after the start of the 2005/2006 operating
the latest by 30
into force at
year and enter
September 2006;

(d) Germany must

inform the Commission of

the
measures taken in a report to be submitted at the
latest at the end of the second quarter of 2005. A
second report on the actual
implementation of the
measures should be submitted to the Commission at
the latest by the end of 2006,

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HAS ADOPTED THIS DECISION:

Article 1

By 31 December 2006 at the latest Germany shall report to the
Commission on the actual application of the measures taken.

The aid scheme for grain brandy producers contained in
Germany's Spirits Monopoly Law is incompatible with the
common market.

Article 4

This Decision is addressed to the Federal Republic of Germany.

Article 2

Germany shall take all necessary measures to abolish the aid
scheme referred to in Article 1 as from 30 September 2006.

Brussels, 16 November 2004.

Article 3

By 30 June 2005 at the latest Germany shall report to the
Commission on the measures for abolishing the aid scheme.

For the Commission

Mario MONTI
Member of the Commission