JUDGMENT OF 27. 2. 1980 — CASE 171/78 COMMISSION v DENMARK

In Case 171/78

THE COURT composed of: H. Kutscher, President, A. O'Keeffe and A. Touffait (Presidents of Chambers), J. Mertens de Wilmars, P. Pescatore, Lord Mackenzie Stuart, G. Bosco, T. Koopmans and O. Due, Judges, Advocate General: G. Reischl Registrar: A. Van Houtte

gives the following

JUDGMENT

Facts and Issues

I — Facts

II — Written procedure

III — Conclusions of the parties

IV — Submissions and arguments of the parties put forward during the written procedure

The interpretation of Article 95 of the EEC Treaty

The relationship between the various spirits

The infringement of Article 95 of the Treaty

The alleged discrimination against imported products

The alleged similarity between aquavit and other spirits

The alleged infringement of the second paragraph of Article 95

V — Replies to the questions put by the Court and written observations

VI — Oral procedure

Decision

The interpretation of Article 95

The legislation applicable and the framework of the dispute.

The appraisal of the contested tax system

Costs

I —. Facts

II —. Written procedure

III —. Conclusions of the parties

IV —. Submissions and arguments of the parties put forward during the written procedure

(a). The function of Article 95 is to eliminate, after the abolition of customs duties and charges having equivalent effect, the last trade barriers, not only those against identical imported products in relation to domestic products but also those against products which are similar to or in competition with those domestic products. It should operate on the basis of objective criteria which are extraneous to all considerations of economic or social policy. The prohibition on tax discrimination laid down in Article 95 does not allow of any exception and takes precedence over policies which may be followed at a national or Community level. Article 95 is an additional rule of the customs union and leaves no scope for conditional application or application subordinate to criteria for interpretation formulated outside the Community rule. Its aim is to guarantee the transparency of the common market and to protect the principle of the neutrality of taxation at Community level. The tax sovereignty of the Member States has been considerably limited in the interests of intra-Community trade; those limitations relate in particular to the freedom for the national legislature to have recourse to a tax device in order to pursue extra-fiscal objectives. A national tax system should not have secondary effects on the economic activities of traders in the other Member States which are contrary to the attainment of the common market.

(b). The second paragraph of Article 95 extends the prohibition on tax discrimination to competing imported products which may be substituted for domestic products. This provision confirms that barriers to trade expressed by tax measures which are of such a nature as to afford direct or indirect protection to domestic production from competition by imported products are incompatible with the Treaty. It follows from the case-law of the Court that Article 95 is intended to eliminate all discrimination between imported and domestic products which are in whatever manner in legitimate confrontation within the common market.

(c). It is not appropriate to use the device of harmonization for the purpose of eliminating trade barriers of a tax nature: it is incorrect to make the prohibition on tax discrimination which flows from Article 95, a provision which has direct effect, subject to the adoption of implementing rules forming the subject-matter of harmonization directives within Article 99 of the Treaty.

(d). As regards the concept of similar products, it follows from the case-law of the Court that the relationship of similarity referred to in the first paragraph of Article 95 exists where the products in question must normally be considered as coming under the same tax, customs or statistical classification as the case may be and that it is appropriate to compare products which, at the same stage of production or marketing, have similar characteristics and meet the same needs from the point of view of consumers. The fact that a domestic product and an imported product are or are not classified under the same heading of the Common Customs Tariff constitutes in this respect an important criterion.

(a). Spirits, whether obtained from cereals or wine and fruit, have, according to the Explanatory Notes to the Brussels Nomenclature, from the point of view of consumption, similar characteristics and meet the same needs of consumers. Those needs may obviously be determined and influenced by various factors: habits, individual preferences, local or national traditions, social, seasonal and climatic conditions, or even fashion; nevertheless, on the market spirits appear, as far as consumers are concerned, to be products which are no longer complementary but parallel, in other words similar products within the meaning of the first paragraph of Article 95.

(b). The difference between aquavit and other spirits such as gin and vodka on the one hand and whisky and cognac on the other is solely a question of flavour. There is therefore no need to take into consideration Danish consumer habits. It seems even less appropriate to make a determining factor the fact that consumer habits may very well be a result of the price of the beverage, that is indirectly of the taxation imposed on it.

(c). The fact that aquavit is essentially consumed with meals is irrelevant as regards the appraisal of the concept of similarity within the meaning of Article 95. That provision prohibits the influencing of the structure of consumption by means of a discriminatory tax policy.

(d). Since 1972 a considerable increase in the range of products offered to consumers has been noted in Denmark; a series of new schnapps products manufactured in Denmark and having a special flavour has appeared on the market. This is schnapps obtained by the addition of special substances, generally plant extracts, which endow the drink with its characteristics and therefore determine its possible uses. The great variety of Danish spirits means that they may be substituted for other spirits such as gin or geneva whose characteristics are similarly endowed by a special plant flavouring.

(e). Aquavit has various possible uses, like other spirits: it may be used in cooking, as a preservative, to accompany coffee and for the preparation of a special drink consumed in winter or of cocktails. It may therefore be treated like other spirits.

(a). The preferential taxation from which aquavit (and schnapps) benefit in Denmark as compared with other spirits which are competing or similar products is quite obviously contrary to Article 95 of the EEC Treaty.

(b). It follows from the judgment of the Court of 10 October 1978 in Case 148/77, Hansen v Hauptzollamt Flensburg [1978] ECR 1787, that Article 95 does not authorize preferential systems based on social or other grounds; this finding also applies as regards systems of discriminatory taxation based on the fact that a spirit is consumed with meals.

(c). As regards, in the alternative, the second paragraph of Article 95, it is necessary to state that taxes imposed in Denmark on other spirits contain an element intended to protect aquavit. The prohibition on measures intended to protect domestic products against imports from other countries is applicable whatever the extent of the protection; in the present case, the difference in taxation is particularly great and extends over a long period. It is therefore difficult to determine the market share of other spirits if the taxation system had been neutral as required by Article 95.

(a). The Danish system of taxation on spirits is not discriminatory: the excise duty levied on spirits applies without regard to the origin of the products. The basic condition for the application of Article 95 is therefore lacking.

(b). The first paragraph of Article 95 prohibits both formal discrimination resulting directly from the tax provision itself and real discrimination. However, in both situations the crossing of the frontier constitutes the chargeable event giving rise to a higher tax on imported products; this is not the case of the Danish legislation.

(c). In any case, the situation on the market in spirits provides no support for the Commission's arguments.

(d). A judgment making the freedom of choice by consumers and producers the decisive criterion for an alleged breach of Article 95 goes well beyond the results of the present state of the case-law of the Court of Justice within the context of Article 95.

(e). To accept the Commission's interpretation would imply a considerable extension of the scope of Article 95. The chapter of the Treaty devoted to tax provisions assumes that the Member States have retained the power themselves to determine tax policy and taxation; this finding results indirectly from Article 99 of the Treaty.

(f). The excise duty levied in Denmark on spirits constitutes in fact an adjusted ad valorem duty based solely, for reasons of tax practice, on the quantity of alcohol. The element of value is taken into account through the gradation of the rates of tax. The fact that, from a purely technical point of view, that tax system takes the form of a specific tax with two rates cannot by itself constitute a breach of the Treaty.

(g). It follows from the judgment of the Court of 10 October 1978 (Hansen) that Article 95 does not prevent national tax systems from providing for different rates for different types of spirits. The reasoning underlying that judgment must also apply to the special rate in force in Denmark in the case of aquavit; that cannot be considered to be a system of partial or total exemption but to be a system whose legitimate objective is to create a situation of equality from the point of view of taxation.

(a). Contrary to the Commission's opinion, the decision whether two products must be considered as similar products must be made on the basis of a material and not.a formal criterion.

(b). The Brussels Nomenclature did not intend to decide the question whether certain goods must be defined as identical from the point of view of consumers; its object is to establish a precise and unambiguous classification. It does not therefore, as such, contain indications as to whether two products are possibly similar from the material point of view within the meaning of the first paragraph of Article 95.

(c). As it is necessary to examine, on the basis of a concrete approach, whether the two products -have the same characteristics and meet the same needs from the point of view of consumers, it should be pointed out that aquavit is almost always and exclusively consumed at meals, which is not so in the case of other spirits. Consumer habits are, in this context, important: there is no other true criterion enabling the opinion of consumers with regard to consumer products to be known.

(d). Within the context of an abstract appraisal of the characteristics of products, the typical characteristics linked to the flavour of the various products form the decisive criterion as regards spirits for human consumption.

(a). The volume of Danish production of spirits other than aquavit is not so negligible that the other spirits must be considered as coming from other Member States.

(b). Aquavit and other spirits are not in true competition.

(c). In the same way, the Commission has in no way shown that the duty levied on spirits other than aquavit is protective in nature in favour of aquavit.

V —. Replies to the questions put by the Court and written observations

VI —. Oral procedure

1. By application of 7 August 1978, the Commission lodged under Article 169 of the EEC Treaty an application for a declaration that the Kingdom of Denmark, by applying discriminatory taxation on spirits, has failed to fulfil its obligations under Article 95 of the EEC Treaty.

2. At the same time, the Commission submitted to the Court of Justice applications against the French Republic and the Italian Republic relating to problems of the same nature. The applications contain, in all three instances, certain general considerations from which it follows that those applications form part of a general action aiming to ensure that the Member States concerned comply with the obligations imposed on them by the Treaty in this respect. It therefore seems appropriate to clarify first of all certain questions of principle common to the three cases as regards the interpretation of Article 95 in the light of the special features of the market in spirits.

3. Under the first paragraph of Article 95 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. The second paragraph of that article adds as follows: Furthermore, 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.

4. The abovementioned provisions supplement, within the system of the Treaty, the provisions on the abolition of customs duties and charges having equivalent effect. Their aim is to ensure free movement of goods between the Member States in normal conditions of competition by the elimination of all forms of protection which result from the application of internal taxation which discriminates against products from other Member States. As the Commission has correctly stated, Article 95 must guarantee the complete neutrality of internal taxation as regards competition between domestic products and imported products.

5. The first paragraph of Article 95, which is based on a comparison of the tax burdens imposed on domestic products and on imported products which may be classified as similar, is the basic rule in this respect. This provision, as the Court has had occasion to emphasize in its judgment of 10 October 1978 in Case 148/77, H. Hansen jun. & O. C. Balle GmbH & Co. v Hauptzollamt Flensburg [1978] ECR 1787, must be interpreted widely so as to coyer all taxation procedures which conflict with the principle of the equality of treatment of domestic products and imported products; it is therefore necessary to interpret the concept of similar products with sufficient flexibility. The Court specified in the judgment of 17 February 1976 in the REWE case (Case 45/75 [1976] ECR 181) that it is necessary to consider as similar products which have similar characteristics and meet the same needs from the point of view of consumers. It is therefore necessary to determine the scope of the first paragraph of Article 95 on the basis not of the criterion of the strictly identical nature of the products but on that of their similar and comparable use.

6. The function of the second paragraph of Article 95 is to cover, in addition, all forms of indirect tax protection in the case of products which, without being similar within the meaning of the first paragraph, are nevertheless in competition, even partial, indirect or potential, with certain products of the importing country. The Court has already emphasized certain aspects of that provision in its judgment of 4 April 1978 in Case 27/77, Firma Fink-Frucht GmbH v Hauptzollamt München-Landsberger Straße [1978] ECR 223, in which it stated that for the purposes of the application of the first paragraph of Article 95 it is sufficient for the imported product to be in competition with the protected domestic production by reason of one or several economic uses to which it may be put, even though the condition of similarity for the purposes of the first paragraph of Article 95 is not fulfilled.

7. Whilst the criterion indicated in the first paragraph of Article 95 consists in the comparison of tax burdens, whether in terms of the rate, the mode of assessment or other detailed rules for the application thereof, in view of the difficulty of making sufficiently precise comparisons between the products in question, the second paragraph of that article is based upon a more general criterion, in other words the protective nature of the system of internal taxation.

8. The application in this instance of the criterion of similarity, which determines the scope of the prohibition laid down in the first paragraph of Article 95, has given rise to differences of opinion between the parties. According to the Commission, all spirits, whatever the raw materials used for their manufacture, have similar properties and in essence meet the same needs of consumers. Therefore, whatever the specific characteristics of the various products coming within that category and whatever the consumer habits in the various regions of the Community, spirits as finished products represent, from the point of view of consumers, a single general market. It is necessary to observe that this concept is expressed in the proposals submitted by the Commission to the Council for the establishment of a common organization of the market in alcohol, based on the application of a single rate of tax for all the products in question on the basis of their pure alcohol content.

9. This concept is contested by the governments of the three defendant Member States. In their opinion, it is possible to distinguish in the case of spirits various categories of product which differ either in terms of the raw materials used or of their typical characteristics or of the consumer habits observed in the various Member States.

10. In this connexion, the Commission points out however that the appraisal of the characteristics of the various alcoholic beverages, in the same way as consumer habits, is variable in time and space and that such factors cannot provide valid criteria as regards the Community taken as a whole. It draws attention moreover to the danger of hardening such habits by means of tax classifications made by the Member States.

11. These arguments prompt the following reply from the Court. The application of the provisions of Article 95 to specific national situations forming the subject-matter of the applications submitted by the Commission must be examined in the context of the general state of the market in alcoholic beverages within the Community. In this respect it is necessary to take into account three lines of thought:

12. Two conclusions follow from this analysis of the market in spirits. First, there is, in the case of spirits considered as a whole, an indeterminate number ot beverages which must be classified as similar products within the meaning of the first paragraph of Article 95, although it may be difficult to decide this in specific cases, in view of the nature of the factors implied by distinguishing criteria such as flavour and consumer habits. Secondly, even in cases in which it is impossible to recognize a sufficient degree of similarity between the products concerned, there are nevertheless, in the case of all spirits, common characteristics which are sufficiently pronounced to accept that in all cases there is at least partial or potential competition. It follows that the application of the second paragraph of Article 95 may come into consideration in cases in which the relationship of similarity between the specihc varieties of spirits remains doubtful or contested.

13. It appears from the foregoing that Article 95, taken as a whole, may apply without distinction to all the products concerned. It is sufficient therefore to examine whether the application of a given national tax system is discriminatory or, as the case may be, protective, in other words whether there is a ditterence in the rate or the detailed rules for levying the tax and whether that ditterence is likely to favour a given domestic production. It will be necessary to examine within this framework the economic relationships between the products concerned and the characteristics of the tax systems which torm the subject-matter of the disputes in the case of each of the applications lodged by the Commission.

14. In the various procedures, the parties have relied, with regard to the distinction between several categories of alcoholic product, upon certain statements made by the Court of Justice in the judgment in the Hansen & Balle case, supra, which was delivered at a time when these applications were pending. Reference has been made more particularly to a passage in that judgment which states as follows: At the present stage of its development and in the absence of any unification or harmonization of the relevant provisions, Community law does not prohibit Member States from granting tax advantages, in the form of exemption from or reduction of duties to certain types of spirits or to certain classes of producers. Indeed, tax advantages of this kind may serve legitimate economic or social purposes, such as the use of certain raw materials by the distilling industry, the continued production of particular spirits of high quality, or the continuance of certain classes of undertakings such as agricultural distilleries.

15. Since certain of the defendant Governments have relied upon these statements in order to justify their tax system, the Court has asked the Commission questions as to the compatibility with Community law ot the differences in the rates of tax applied to various categories of alcoholic beverages and as to its intentions in that respect within the context ot the harmonization of tax legislation. The Commission, after restating its view that all spirits are similar and its intention to propose the introduction, at least in principle, of a single rate of tax in future Community regulations, draws attention to the fact that the problems linked to the use of certain raw materials, continued high-quality production and the economic structure ot manufacturing undertakings to which the Court referred in the abovementioned judgment may be resolved by means of aid to producers or systems of compensation between producers, taking into account the. difference in the cost of the raw materials used. It draws attention to the tact that this objective has already been attained within the context ot the common organization of the market in wine as regards spirits obtained by distilling wine. According to the Commission, such mechanisms might safeguard the marketing chances of certain products which are handicapped by production costs, without its being necessary to have recourse tor this purpose to the procedure of variation in the rates of tax.

16. In view of these observations, the Court points out that although it acknowledged in the judgment in the Hansen & Balle case, taking into account the state of development of Community law, that certain tax exemptions or tax concessions are lawful, this is on condition that the Member States using those powers extend the benefit thereof without discrimination to imported products in the same conditions. It is necessary to emphasize that it was acknowledged that those practices were lawtul in particular so as to enable productions or undertakings to continue which would no longer be profitable without these special tax benefits because ot the rise in production costs. On the other hand, the considerations expressed in that judgment cannot be understood as legitimating tax differences which are discriminatory or protective.

17. The Danish legislation, as in force at the date of the dispute, in other words Article 2 of Coordinated Law No 151 of 4 April 1978 on excise duty on spirits, provides that excise duty shall be fixed as follows:

18. Under Article 3 of the same law, products benefiting from the rate of tax fixed by the first paragraph of Article 2 are defined as being manufactured from neutral spirits and containing in their composition vegetable flavouring extracts and moreover as not resembling gin, vodka, geneva, wacholder, etc., liqueur, punch, bitters, etc; aniseed spirits, rum, spirits distilled from fruit and other spirits whose typical taste is produced through distillation or maturation.

19. As a preliminary, the Danish Government examines the relationship between Article 95, on which the Commission has based its application, and Article 99 on the harmonization of tax legislation. It asks whether the implementation of that harmonization should not take priority over the application of Article 95. It claims that since the Member States have retained the power themselves to determine tax policy and taxation, the effects which a tax system might have on the normal functioning of the common market should be eliminated by virtue of the harmonization of legislation provided for by Article 99. The Commission should not arbitrarily seek to impose such harmonization under Article 95 instead of following the procedure laid down by Article 99.

20. There is no doubt that the disparity in the national tax systems and in particular the differences in the rates of tax which are particularly pronounced as regards taxation on spirits constitute an obstacle to the free movement of goods and to the development of trade between the Member States. However, the implementation of the programme of harmonization laid down by Article 99 cannot constitute a preliminary to the application of Article 95. Whatever in fact the disparities between the national tax systems, Article 95 lays down a basic requirement which is directly linked to the prohibition on customs duties and charges having an equivalent effect between the Member States in that it intends to eliminate before any harmonization all national tax practices which are likely to create discrimination against imported products or to afford protection to certain domestic products. It therefore appears that Articles 95 and 99 pursue different objectives, since Article 95 aims to eliminate in the immediate future discriminatory or protective tax practices, whilst Article 99 aims to reduce trade barriers arising from the differences between the national tax systems, even where those are applied without discrimination.

21. This argument must therefore be rejected, with the result that the application must be examined exclusively within the context in which it was lodged by the Commission, in other words, within that of Article 95.

22. The Commission considers that the Danish tax system is discriminatory as regards spirits imported from the other Member States because the bulk of domestic production, constituted by aquavit, benefits from a reduced rate of tax whereas similar or competing alcoholic beverages imported from the other Member States are subject to the highest rate of tax, apart from insignificant quantities which have the specific characteristics of aquavit as defined by the law.

23. In this respect the Commission puts forward the following figures which are not contested by the Danish government: during 1977, chosen as the reference year, of a total consumption of 9240000 litres of pure alcohol, 5787000 litres benefited from a reduced rate of tax; of that quantity, 5728000 litres were produced in Denmark, whereas 59000 litres only were imported, in other words approximately 34000 litres from the Federal Republic of Germany and the rest from third countries. As for other spirits, the consumption of which, expressed in pure alcohol content, was 3452000 litres during the reference year, 1118000 litres were of domestic production whereas 2334000 litres were imported.

24. According to the Commission, those figures show that the reduced rate of tax benefits almost exclusively a type of spirit which represents the bulk of domestic production whereas the heaviest rate of tax applies to all other alcoholic beverages of which the majority are imported products (in other words, approximately two-thirds thereof). As a whole, this tax system therefore clearly discriminates against imported spirits. As such, this system is contrary to the first paragraph of Article 95 of the Treaty, according to which a Member State cannot impose on the products of other Member States internal taxation in excess of that imposed on similar domestic products. If the similarity between aquavit and other spirits referred to by the Danish law is not acknowledged, the Commission considers that the difference created by that law is in any case of such a nature as to afford indirect protection to the domestic production of aquavit within the meaning of the second paragraph of Article 95.

25. The Danish Government contests the opinion put forward by the Commission according to which all spirits for human consumption produced by distillation must be considered as similar products within the meaning of the first paragraph of Article 95. It considers that the Treaty does not prevent the Member States from making classifications between the various alcoholic products so as to apply to those products different rates of tax. The Court of Justice itself, it claims, acknowledged in its judgment in the Hansen & Balle case, supra, the power for Member States to create certain differences as regards taxation on spirits. The defendant Government considers that the Danish State is therefore entitled to maintain a difference in the rates of tax on the basis of the special properties which are characteristic of the products listed in both categories laid down in its tax legislation. The Danish Government is of the opinion that consumer habits provide a criterion whereby aquavit may be differentiated from other alcoholic beverages. In support of that statement it produces market surveys showing that aquavit, by virtue of Danish eating and drinking habits, is consumed principally at meals as an accompaniment to typical dishes so that it cannot be considered as a product equivalent to other spirits.

26. Moreover, the Danish Government draws attention to the fact that the contested tax system makes no distinction between imported products and domestic products. According to their classification in comparison with the categories of tax laid down by the law, the products are taxed at the corresponding rate, whatever their origin; thus imported aquavit benefits from the rate of tax levied on domestic aquavit, whilst other domestic alcoholic beverages are subject to the same rate of tax as imported products. The shares held by the various products on the market are of no importance for the purposes of appraising whether the law is compatible with Article 95. It thus appears that in the system of the Danish law there is no relationship between the fact that goods cross a frontier and the application of a higher rate of tax.

27. The Danish Government recalls in addition that for a certain period alcoholic beverages were subject to a mixed tax system which involved, in addition to a specific duty, the application of an ad valorem duty. The excise duty levied under the present legislation is in fact nothing more than an adjusted ad valorem duty. This fact explains why aquavit, as an inexpensive product, benefits from a more favourable rate of tax than other spirits whose production costs are higher. Moreover, there is nothing to prevent Denmark from reintroducing the old system; a tax applied according to that method would amount to reducing the tax on aquavit even further whereas spirits with a high production cost, such as whisky and cognac, would be taxed even more heavily.

28. As for the application of the second paragraph of Article 95, the Danish Government states that the real consumer choice is between aquavit and beer, on the one hand, and wine, on the other; the possibilities of substituting aquavit for other spirits and vice versa are on the other hand negligible. For the purposes of the application of the second paragraph of Article 95 the determining criterion is a marked cross-elasticity between products so that a slight increase in the price of one product has the effect of displacing a high proportion of demand to another. The Danish Government recalls in this respect the criteria which the Court applied in order to delimit the markets concerned with a view to the application of the competition rules contained in the Treaty. For its part, the Commission, it claims, has not produced any evidence to establish the existence of a protective effect which is the condition for the application of the second paragraph of Article 95.

29. In the alternative conclusions listed in its defence, the Danish Government requests the Court to limit, if necessary, the declaration that it has failed to fulfil its obligations under the Treaty to those products which, because they have a special affinity with aquavit, must be treated in the same way as aquavit from the tax point of view, and to dismiss the application with regard to the remainder.

30. In the defence put forward by the Danish Government, it is necessary to reject, as a preliminary, the argument based on the fact that the system in question is nothing other than a transformed system of ad valorem taxation. In fact, every tax system must be appraised in the light of Article 95 on its own merits and not in terms of a tax system which preceded it or which might if necessary be substituted for it. Moreover, it is necessary to emphasize the contradictory nature of the argument put forward in this respect by the Danish Government.

31. The appraisal of the compatibility of the Danish tax system with Article 95 raises a special problem in that the preferential rate laid down by the Danish legislation benefits a single product defined precisely by the law to the exclusion of all other spirits. It is therefore necessary to appraise the existence of either a relationship of similarity or competition between a single product and an indeterminate number of products some of which are identified by the law whereas others are not specified.

32. In this connexion, it is necessary to point out, first, that of the products subject to the highest rate of tax there are several named beverages the characteristics of which are akin to aquavit in that they are normally manufactured from neutral alcohol and owe their characteristic flavour to added flavouring extracts. It is necessary to assume that those products have been listed expressly among the spirits subject to a higher rate of tax precisely because of their similarity. In the case of those beverages there can therefore be no doubt that there has been an infringement of the first paragraph of Article 95.

33. As regards most of the other alcoholic beverages subject under the Danish legislation to the highest rate of tax, it is impossible to establish with certainty how many of them are spirits which may be classified as similar to aquavit within the meaning of the first paragraph of Article 95 and how many of them are products which, although they cannot be classified as similar, are in competition or in the substitution relationship with aquavit which is referred to by the second paragraph of the same article.

34. The Court considers that it is not necessary to give a ruling on this matter in order to resolve the present dispute. In fact, even if doubts remain as to the question to what extent the numerous alcoholic products classified by Danish legislation in the most heavily taxed tax category must be considered as products similar to aquavit within the meaning of the first paragraph of Article 95, it is impossible reasonably to contest that all those beverages are without exception in at least partial competition with the product benefited by the Danish legislation.

35. In fact, as indicated above, the spirituous beverages referred to by the Danish legislation as products obtained by distillation nave sufficient characteristics in common with aquavit to constitute at least in certain circumstances an alternative choice for consumers. Because of their very varied properties, these beverages are likely to be in competition with aquavit at times. The fact that aquavit is preferred in Denmark by consumers as an accompaniment to certain typical meals does not prevent that beverage from still being used for other purposes or from thus being in at least a partial substitution relationship with an indeterminate number of other types of spirit. It may therefore be said that to the extent to which the spirituous beverages on which the highest tax burden is imposed are not beverages which are similar to aquavit within the first paragraph of Article 95 they are in any case in competition with aquavit as referred to in the second paragraph of Article 95.

36. Viewed by itself, the tax system introduced by the Danish legislation contains incontestable discriminatory or protective characteristics. Although it does not establish any formal distinction according to the origin of the products, it has been adjusted so that the bulk of the domestic production of spirits comes within the most favourable tax category whereas almost all imported products come within the most heavily taxed category. These characteristics of the system are not obliterated by the fact that a very small fraction of imported spirits benefits from the most favourable rate of tax whereas, conversely, a certain proportion of domestic production comes within the same tax category as imported spirits. It therefore appears that the tax system is devised so that it largely benefits a typical domestic product and handicaps imported spirits to the same extent.

37. In conclusion, it is necessary to state that the system of taxation applied to spirits in the Kingdom of Denmark, as follows most recently from the Coordinated Law of 4 April 1978, is incompatible with the requirements of Article 95 of the Treaty, without its being necessary to make a distinction in this respect between the first and the second paragraph of that provision. It follows that the alternative conclusions put forward by the Danish Government in its defence are purposeless.

38. Under Article 69 (2) of the Rules of Procedure the unsuccessful party shall be ordered to pay the costs.

39. Since the defendant has failed in its submissions, it must be ordered to pay the costs.

On those grounds, THE COURT hereby:

1 Declares that, by the application of a discriminatory tax on spirits as follows from Coordinated Law No 151 of 4 April 1978, the Kingdom of Denmark has failed, as regards products imported from the other Member States, in its obligations under Article 95 of the EEC Treaty;

2 Orders the Kingdom of Denmark to pay the costs.