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Brussels, 9th September 2002

Car taxation: Commission presents new strategy

The European Commission has presented a comprehensive strategy on the taxation of passenger cars in the European Union. First, the Commission analyses current passenger car taxation systems and explores ways of improving their co-ordination so as to remove the present considerable tax obstacles and distortions to free movement of passenger cars within the Internal Market. Registration taxes are identified as the biggest problem and therefore the Commission recommends their gradual reduction and even abolition, to be replaced by annual road taxes and fuel taxes (so that the tax burden would remain the same but related to the use of a car rather than its acquisition). The Commission also recommends a certain degree of approximation of annual road taxes to prevent car market fragmentation. Second, the Commission examines ways of restructuring existing vehicle taxes so as to put more emphasis on environmental objectives in line with Community policy and the Kyoto Protocol. In particular, it recommends that the taxation of new passenger cars be more directly related to their CO2 emissions. The Commission urges Member States to take these recommendations into account when evaluating and revising their national vehicle taxation systems. Moreover, the Commission may present proposals for Community legislation on the basis of these principles and in the light of the results of consultations with interested parties based on this strategy Communication.

"I am determined to tackle the tax obstacles individual citizens and car manufacturers face within the Internal Market arising from fifteen different systems of car taxation within the EU", commented Taxation Commissioner Frits Bolkestein. "All too often people have to pay through the nose when they move a car from one country to another. We also have to try to ensure that car taxes are more clearly geared to meeting the Community's environmental objectives."

Present car tax systems in Member States

Member States' taxes on passenger cars are very diversified in terms both of their structure and levels. They include tax payable at the time of acquisition of the car (registration tax), periodic tax payable in connection with the ownership of the passenger car (annual road tax), taxes on fuel, and other taxes such as VAT, insurance taxes, registration fees and road tolls. The Commission strategy paper focuses on registration tax, annual road tax and to some extent fuel taxes, as they are by far the most important passenger car-related taxes. Registration tax exists in ten of the fifteen Member States, ranging in 1999 from an average of €267 in Italy to €15659 in Denmark. Usually Member States applying no, or low, registration tax compensate by applying higher fuel tax levels. All Member States apart from France apply annual road tax at national level. Tax bases and tax levels applied vary greatly: the average annual road tax paid in 1999 ranged from €30 per vehicle per year in Italy to €463 in Denmark.

Impact on the Internal Market

The way in which Member States apply their car taxes is giving rise to an increasing number of problems for citizens and the car trade. From the motor industry viewpoint, the wide differences in tax systems have a negative impact on their ability to achieve the potential benefits of operating within an Internal Market, and consequently to improve competitiveness and create new jobs. At present industry is often obliged to produce specific car models, with different specifications (concerning horsepower, diesel etc.) to reduce pre-tax prices, in particular when vehicles are destined for high tax Member States. This generates additional costs. On the other hand, precisely because of the differences in tax levels, the car industry often adapts its pre-tax prices according to the level of taxation in Member States. Pre-tax prices are in general lower in those Member States with a high registration tax. The Commission estimates that about 20% of European car price differentials are due to different tax levels.

The car tax-related problem most frequently faced by private individuals is that registration tax must normally be paid a second time when a car is moved from one Member State to another without a permanent change of residence (for example, when someone buys a second-hand car in another EU Member State to take advantage of lower prices there and brings it back to his own country or moves his car to another Member State where he has a second home and leaves it there.) This is despite the fact that registration tax has already been paid in the first Member State and is not refunded by that Member State. Furthermore, the residual car values applied for the purposes of calculating that second registration tax are often excessive which results in disproportionately high registration tax. Where residence is permanently changed, registration tax is not normally payable again but certain fees may be chargeable. The case law of the Court of Justice has helped to resolve some of the problems in this area but many problems remain.

Short and long term measures to remove these obstacles

The Commission recommends that, to eliminate the problem of double registration tax, all ten Member States applying a registration tax should establish a system of refund of the residual tax in all cases where a passenger car, registered in one Member State, is moved permanently to another Member State. The Commission calls upon Member States to ensure that their rules on the method of calculation of registration tax on used cars imported from other Member States are transparent and in accordance with the case law of the Court of Justice.

In the long-term, because registration tax is a clear obstacle within the Internal Market, the Commission recommends that registration tax levels should be gradually reduced, stabilised at low levels and preferably abolished over a transitional period of five to ten years. Instead, the Commission suggests, Member States should raise revenue from car owners by switching over to increased annual road taxes, and to some extent to fuel taxes.

The Commission recommends that Member States should bring their annual road taxes closer together, in particular as regards tax bases, so that car manufacturers do not have to produce different models (e.g. with different engine horsepower) for different Member States.

The Commission in making these recommendations demonstrates its determination to have the Internal Market deliver tangible benefits to European citizens. This overriding objective was also the motivation for the recent adoption by the Commission of new competition rules for distribution and servicing of passenger cars, which will enter into force as of 1 October 2002 (see IP/02/1073 of 17 July 2002).

Restructuring tax systems to meet environmental objectives

The Commission recommends that both registration tax (as long it remains) and annual road tax should be based entirely or partly on CO2 emissions. Currently only one Member State (the United Kingdom) applies a CO2 based road tax. It also recommends that taxation of the use of company cars (e.g. when people pay income tax on the use of a company car given in lieu of remuneration) should also include a clear and strong incentive to use more CO2 efficient cars.

According to the conclusions of a recent study undertaken for the European Commission, more significant CO2 reductions can be achieved if the tax level is more directly related to the CO2 performance of each new passenger car. The European Council and the European Parliament have adopted a target of reducing CO2 emissions from new passenger cars to 120 grams per kilometre if possible by 2005, or by 2010 at the latest. The car industry committed itself to reduce these emissions to 140 g CO2/km, mainly through technical improvements, leaving a "gap" of 20 g CO2/km which has to be covered in particular by using fiscal incentives. Meeting the 120 g/km target is of importance for the achievement of the Community's Kyoto Protocol targets.

Proposals for legislation

The Commission recommends that the Council of EU Ministers endorses the general principles of the Communication and urges Member States to take them into account when evaluating and revising their national vehicle taxation systems. Once it has had discussions with Member States, the European Parliament and other interested parties, the Commission may submit proposals for Community legislation based on these principles.


Two existing 1983 Council Directives prohibit the application of registration taxation to cars when persons move, either temporarily or permanently, from one Member State to another. However, in order to benefit from the exemption a number of conditions must be fulfilled. For example, if the transfer of the car coincides with the change of normal residence, the imported car must be owned for more than six months before the transfer. Two studies have been carried out for the Commission, one on vehicle taxation in the Member States of the EU and the other on fiscal measures to reduce CO2 emissions from new cars. Both are available on the Europa internet site at:

The full text of the Communication on the Taxation of Passenger Cars in the European Union is available on the Europa internet site:

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