Communication from the Commission to the Council in accordance with Article 19(1) of Council Directive 2003/96/EC (operation of private pleasure craft)
Date: 2006-11-30
Institutions: European Commission
Subjects: Belgium, Malta, United Kingdom, derogation from EU law, fuel tax, pleasure craft, tax exemption, tax system

COMMISSION OF THE EUROPEAN COMMUNITIES 

Brussels, 30.11.2006 
COM(2006) 743 final 

COMMUNICATION FROM THE COMMISSION TO THE COUNCIL 

in accordance with Article 19(1) of Council Directive 2003/96/EC 
(operation of private pleasure craft) 

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1. 

INTRODUCTION  

In  accordance  with  Article  19(1)  of  Council  Directive  2003/96/EC1  restructuring  the 
Community framework for taxation of energy products and electricity (hereafter referred to as 
the “Energy Tax Directive” or the "Directive"), in addition to the provisions foreseen in the 
Directive,  in  particular  in  its  Articles  5,  15  and  17,  the  Council  acting  unanimously  on  a 
proposal  from  the  Commission,  may  authorise  any  Member  State  to  introduce  further  tax 
exemptions or tax reductions for specific policy considerations. 

The Commission shall examine the requests. Afterwards, it shall either present a proposal to 
the Council or, alternatively, shall inform the Council of the reasons why it has not proposed 
the authorisation of such a measure. 

Within a broader framework of review of derogations expiring in the Energy Tax Directive by 
the  end  of  2006,  Belgium,  the  United  Kingdom  and  Malta  submitted  a  request  for 
authorisation to derogate from 2007 onwards from the provisions of the Energy Tax Directive 
for fuels used for navigation in private pleasure craft. These letters were registered with the 
Directorate General for Taxation and Customs Union2. 

The  purpose  of  this  communication  is  to  inform  the  Council  of  the  reasons  why  the 
Commission has not proposed such authorisations. 

2. 

SUMMARY OF THE REQUEST 

2.1. 

The Belgian request 

Belgium would like to apply full tax exemption to gas oil supplied for use as fuel for private 
pleasure craft. The intended measure refers both to navigation within Community waters and 
inland  waterways.  The  purpose  of  this  measure  is  to  promote  the  development  of  pleasure 
navigation  and  tourism  and  to  facilitate  private  boat  owners  the  use  of  the  same  station-
services than for the navigation exempt under Energy Tax Directive. 

The request does not foresee any date of termination.  

2.2. 

The United Kingdom request 

The  United  Kingdom  would  like  to  apply  a  reduce  rate  of  taxation  (in  the  amount  of  GBP 
6.44 pence a litre) to gas oil used as fuel for private pleasure navigation within Community 
waters and inland waterways. 

The  objectives  of  the  requests  are  to  avoid  costs  of  transition  that  would  be  caused  by  the 
expiry  of  the  derogation.  Furthermore,  the  United  Kingdom  explained  that  the  derogation 
pursues also regional policy objectives. 

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Council Directive 2003/96/EC of 27 October 2003 restructuring the Community framework for taxation 
of energy products and electricity (OJ L 283 of 31.10.2003 p. 51; Directive last amended by Directives 
2004/74/EC and 2004/75/EC (OJ L 157 of 30 April 2004, p. 87 and p.100). 
Letters registered on 13 October 2006 (Belgium and Malta) and on 16 October (United Kingdom). 

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The  United  Kingdom  maintains  that  there  are  minimal  benefits  from  the  standard  tax 
treatment in comparison to the costs and other consequences associated with the expiry of the 
derogation, or that these costs would even be disproportionate compared to the to the benefits 
that  might  be  achieved  through  standard  tax  treatment.  The  United  Kingdom  further  points 
out  insignificant  revenue  gain  and  the  small  benefit  in  terms  of  carbon  emission  saved 
associated with introduction of the general tax treatment. In particular, the United Kingdom 
highlights  the  compliance  costs  for  the  boat  owners  and  fuel  suppliers  as  well  as  the 
administrative  costs  and  enforcement  difficulties  for  the  administration  associated  with  the 
end of the derogation. The United Kingdom further claims disproportionate negative effects 
on  both  the  boating  sector  and  many  small  businesses  associated  with  it.  In  addition, 
according to the United Kingdom, expiry of the derogation will raise health and safety issues 
by reducing the number of refuelling stations along the coats. 

In  addition,  the  United  Kingdom  contends  that  the  derogation  pursues  regional  policy 
objectives,  as  the  expiry  of  the  derogation  would  adversely  affect  tourism-focused 
regeneration schemes in disadvantaged coastal areas of the UK that have received significant 
investment from EU Structural Funds. The United Kingdom outlines that economic decline in 
coastal  regions  is  a  result  of  dependence  upon  traditional  industries,  such  as  fishing  and 
boatbuilding.  Coastal  areas  have  received  substantial  assistance  from  the  EU  Structural  and 
Cohesion  Funds  to  aid  economic  re-generation  and  diversification.  The  United  Kingdom 
expressed  concern  over  the  possibility  coastal  re-generation  in  the  UK  (Scotland)  might  be 
undermined by the expiry of the derogation. 

The request foresees a date of termination by 31 December 2011. 

2.3. 

The Maltese request 

Malta would like to apply full tax exemption to gas oil used as fuel by private pleasure sea 
craft for outbound voyages.  

The  purpose  of  the  measure  is  to  compensate  the  tourism  sector  for  Malta's  insularity  and 
peripheral location at the extreme southern border of the European Union and for the strong 
competition  from  operators  based  in  no-European  countries  which  are  not  subject  to 
Community excise legislation. Malta considers that the measure would not be detrimental to 
the proper functioning of the internal market nor result in distortions of competition, due to its 
geographical  position  and  the  rigorous  controls  in  place  to  ensure  the  correct  application  of 
the measure. Furthermore, Malta underlines the importance of the derogation as a marketing 
tool  to  attract  services  like  maintenance  and  repair  works  which  are  provided  together  with 
the  supply  of  the  exempt  fuel.  Finally,  Malta  stresses  the  importance  of  the  activity  for  the 
tourism and the negative effects of the end of the derogation in the employment and growth in 
the sector. 

The request foresees a date of termination by 31 December 2012 

3. 

BACKGROUND TO THE REQUESTS 

According to Article 14(1)(c) of the Energy Tax Directive, Member States shall exempt from 
taxation  energy  products  supplied  for  use  as  fuel  for  the  purpose  of navigation  within 

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Community  waters  (including  fishing),  other  than  private  pleasure  craft3.  Traditionally, 
Member  States  may  extend  such  exemption  to  navigation  in  inland  waterways  (currently 
contained  in  Article  15(1)(f)).  These  provisions  were  for  the  first  time  introduced  into 
Community  excise  legislation  in  19924  and  in  both  cases  private  pleasure  navigation  is 
explicitly excluded from them. As a result, the operation of private pleasure craft is subject to 
standard  taxation  according  to  national  rates  in  compliance  with  the  Directive,  unless  a 
particular derogation is available under Articles 18, 18a or 19 of the Directive. 

The  gradual  phasing-out  of  the  derogations  in  point,  now  contained  in  Articles  18  and  18a 
with  annexes  II  and  III  to  the  Directive,  was  initiated  by  the  Commission  in  its  review  of 
derogations  undertaken  in  2000  when  it  stated  that  these  derogations  should  end  with  the 
forecasted  entry  into  force  of  the  Energy  Tax  Directive  or,  in  any  case,  at  the  latest  on 
31 December 20025. In the end, the derogations were extended until 31 December 2006 and 
were later incorporated into the Energy Tax Directive with the view to allow for their smooth 
phasing-out. The same termination date was chosen for Malta in the context of its accession to 
the Community (Article 18a and Annex III). 

In  its  June  2006  Communication  Review  of  derogations  in  Annexes  II  and  III  of  Council 
Directive  2003/96/EC  that  expire  by  the  end  of  2006  (hereafter  referred  to  as  "the  2006 
Communication")6  the  Commission  stated  that  the  favourable  tax  treatment  of fuel  used  for 
the  activity  in  point,  compared  to  fuel  used  for  comparable  (transport  or  leisure)  activities, 
should not be renewed. The Commission has at the same time invited the Member States in 
case  they  consider  that  for  specific  policy  considerations  a  further  derogation  is  still 
necessary, to submit a request in accordance with Article 19 of the Directive duly justifying 
the policy needs. 

4. 

EVALUATION BY THE COMMISSION 

The  Commission  considers  that  Belgium,  the  United  Kingdom  and  Malta  have  to  an 
important  extent  reiterated  arguments  already  examined  in  the  2006  Communication  (the 
expiry  of  the  derogation  will  cause  high  compliance  and  administrative  costs,  risk  of  fraud 
and can negatively affect the development of the activity)7.  

As  mentioned  in  the  2006  Communication,  the  Council,  acting  unanimously  under  the 
procedure  set  out  in  Article  93  EC,  has  deliberately  chosen,  as  a  general  regime,  to  subject 
fuel used in private pleasure craft to standard taxation. This choice reflects fundamentally the 
policies and interests listed in Article 19(1), third indent, of the Directive. These include the 

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Private  pleasure  craft  is  defined  as  “any  craft  used  by  its  owner  or  the  natural  or  legal  person  who 
enjoys its use either through hire or through any other means, for other than commercial purposes and 
in  particular  other  than  for  the  carriage  of  passengers  or  goods  or  for  the  supply  of  services  for 
consideration or for the purposes of public authorities”. 
Council  Directive  92/81/EEC  of  19  October  1992  on  the  harmonization  of  the  structures  of  excise 
duties  on  mineral  oils  (OJ  L  316  of  31.10.1992);  Directive  repealed  together  with  Council  Directive 
92/82/EEC  of  19  October  1992  on  the  approximation  of  the  rates  of  excise  duties  on  mineral  oils  as 
from 31 December 2003 by means of Council Directive 2003/96/EC. 
COM (2000) 678 of 15 November 2000. 
COM(2006) 342  of  30  June  2006  Review  of  derogations  in  Annexes  II  and  III  of  Council  Directive 
2003/96/EC that expire by the end of 2006.  
Cf. the 2006 Communication, sub 2.2.2 

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proper  functioning  of  the  internal  market,  the  need  to  ensure  faire  competition  and 
Community, environment, energy and transport policies. 

Against this background an authorisation under Article 19 should not be granted for reasons 
which are merely inherent in the switch from the derogation to standard taxation. This applies 
obviously  to  the  administrative  burdens  and  compliance  and/or  enforcement  difficulties, 
including  safety  issues8  resulting  from  the  change  itself.  It  also  applies,  however  to  the 
general business consequences (for the sector, for associated businesses or tourism) that could 
follow from standard taxation of  the activity in question, even in a longer term perspective. 
By definition, such general consequences do not correspond to the notion of specific policy 
considerations within the meaning of Article 19 of the Energy Tax Directive. 

The interests and policies set out in Article 19 (1), third indent, equally oppose the granting of 
an authorisation by reference to the above mentioned grounds.  

From the point of view of the internal market and fair competition, taxation should be as 
neutral  as  possible  to  avoid  tax-induced  behaviour  within  the  Community  without  fiscal 
frontiers. The derogation granted to certain Member States does not affect this reasoning. It 
should  be  considered  as  aimed  at  overcoming  initial  difficulties  encountered  with  the 
implementation  of  a  new  legislation.  Taking  into  account  that  fuel  used  in  private  pleasure 
craft has, in principle, been taxable in the Community since 1993 and that Articles 18 and 18a 
of the Energy Tax Directive have put a clear time limit to the corresponding derogation within 
this Directive, those reasons of transitional nature do not justify, today, an authorisation under 
Article 19 of the Directive. 

To the extent that any anticipated loss of business activity (as alleged by some of the Member 
States  concerned  by  the  derogation)  would  reflect  corresponding  gains  of  Member  States 
applying standard taxation, this would confirm that reasons of fair competition plead against 
the granting of an authorisation under Article 19 of the Directive, which would perpetuate the 
distortion.  

From  the  point  of  view  of  Community  environment,  energy  and  transport  policies  the 
Commission  does  not  see  any  reason  why  the  activity  in  point  should  be  treated  for  tax 
purposes more favourably than comparable other (transport or leisure) activities. The purpose 
of energy taxation is not only to generate revenue, but it is increasingly considered as a useful 
tool  for  internalising  the  negative  externalities  related  with  energy  consumption  which  are 
important elements of the above Community policies. At the same time, energy taxation has 
an incentive effect towards improvements in energy efficiency which again should apply also 
to the operation of private pleasure craft. Under this perspective, the mere incentive effect the 
tax exemption granted hitherto may have had on the development of private pleasure crafting 
cannot justify a further derogation from the general rules.  

Finally,  it  is  appropriate,  in  addition,  to  consider  certain  more  specific  arguments  raised  by 
some of the applicant Member States. 

First  of  all  the  Commission  has  to  reject  the  arguments  presented  by  Malta.  It  is  true  that 
harmonised  taxation  may  in  certain  cases  have  effects  on  competition  with  third  countries. 
However,  these  have  already  been  taken  account  by  the  Council  within  Article  14  of  the 

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As regards environmental and safety aspects, these are dealt with in corresponding legislation. They are 
unrelated to the rules of the Energy Tax Directive. 

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Energy Tax Directive. In this regard, the Council has found that these aspects warrant so far 
an exemption in the case of commercial navigation, but not in the particular field concerned 
by the present communication, namely operation of private pleasure craft (cf. 23rd recital of 
the  Energy  Tax  Directive).  In  addition,  and  quite  apart  from  the  competitive  impact  of  the 
derogation  on  the  development  of  the  sector  in  other  Member  States  in  general,  the 
Commission refers to the geographic location of Malta. In view of this, it cannot be excluded 
that 
the  authorisation  requested  may  distort  competition  with  other  Mediterranean 
destinations.  

Secondly, with regards to the regional policy arguments put forward by the United Kingdom, 
the Commission would like to point out that the derogation for the United Kingdom has never 
been  formally  considered  as  an  instrument  of  regional  policy.  In  addition,  the  support 
provided by the Structural Funds was neither targeted, specifically, to the operation of private 
pleasure navigation, nor was it based on the premise that the United Kingdom could continue 
to derogate from the Energy Tax Directive.9  

Finally,  the  Commission  cannot  accept  the  proportionality  argument  raised  by  the  United 
Kingdom.  This  argument  takes  the  temporary  derogation  granted  under  Article  18  as  the 
starting point, which directly conflicts with the fact that the Community legislator set standard 
taxation as the starting point. This also puts into the right perspective a related argument made 
by the United Kingdom, namely that environmental benefits of a switch to standard taxation 
would be limited. The mere fact that the overall consumption through private navigation may 
not  exceed  certain  limits  simply  means  that  the  exemption  is  limited  in  reach.  It  does  not 
mean  that  proportionality  would  require  unequal  treatment  with  comparable  transport  or 
leisure  activities.  Moreover,  the  fact  that  the  implementation  may  require  some  extra  effort 
cannot be decisive either. It is in the nature of tax administration that implementing costs may 
differ  across  the  various  fields,  and  this  does  imply  specific  policy  considerations  which 
would need to be taken into account in the context of Article 19 of the Directive.  

5. 

CONCLUSION 

All in all the Commission considers that Belgium, the United Kingdom and Malta have not 
presented any specific policy considerations that would justify their need to further derogate 
from the legislation enacted in the EU on unanimity at two occasions already and that would 
justify the existence of a fiscal measure that clearly contradicts several Community policies. 
The  arguments  put  forward  by  the  Member  States  concerned  rather  represent  consequences 
of the existence of the derogation itself for a long period of time. 

The Member States have had enough time to adjust to the new situation taking into account 
that this and similar derogations have been under discussion in the Community at least since 
1996  and  the  Commission  repeatedly  insisted  on  the  necessity  to  phase  them  out.  This  is 
equally valid for Malta in which case the time limit for the derogation under Article 18a of the 
Energy  Tax  Directive  was  fixed  so  as  to  coincide  with  the  time  limit  fixed  for  similar 
derogations available at that time for some of the fifteen existing Member States. 

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Besides,  the  Commission  notes  that  the  figures  available  to  it  show  significantly  lower  amounts  of 
Structural  Funds  investment  in  tourism-related  ventures  for  the  purpose  of  coastal  regeneration  than 
those quoted by the United Kingdom. 

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Should  the  expiry  of  the  derogation  cause  difficulties  in  very  specific  or  particular 
circumstances and provided that they respect Community law in all respects10, the applicant 
Member States may adopt measures aimed at alleviating or mitigating problems of transition 
to the regime of standard taxation. 

The Commission therefore concludes that the conditions set out in Article 19 are not fulfilled. 
On this basis, the Commission does not propose the authorisations requested. 

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Including, in particular, the Treaty rules on State aids. 

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