CJEU ruling finds Portugal in breach over ISV on imported used vehicles

Yesterday, 2 September, the Court of Justice of the European Union (CJEU) published the judgment finding that Portugal has failed to comply with EU rules in the way it applies ISV (Vehicle Tax) to used vehicles imported from another Member State, upholding the action brought by the European Commission.

The decision brings to a close a four-year infringement procedure in which Portugal was accused of breaching Article 110 of the Treaty on the Functioning of the European Union (TFEU) - the provision that underpins the principle of free movement of goods between EU Member States.

CJEU ruling on Portugal’s ISV for imported used vehicles

At the heart of the dispute is the method used to calculate ISV for imported used vehicles. In Portugal’s system, depreciation linked to the vehicle’s age is not taken into account for the environmental element of the tax (it is only reflected in the engine-capacity element). In practice, this means imported used vehicles can be charged the same CO₂ emissions tax as if they were brand new.

The CJEU recalls that “the registration tax paid in a Member State is incorporated in the value of the vehicle. When the vehicle is then sold as a used vehicle in that same Member State, its market value, which includes the residual amount of the registration tax, will be equal to a percentage, determined by the depreciation of that vehicle, of its initial value.”

The Court therefore states:

Consequently, the national legislation does not ensure that used vehicles imported from another Member State are subject to a tax amount equal to the tax charged on similar used vehicles already present on the national market, which is contrary to Article 110 TFEU.

Protecting the environment

Portugal’s refusal to amend the law was repeatedly justified by the Government on environmental grounds. The argument was that the aim was not to limit the entry of used vehicles into Portugal, but to make that entry conditional on environmental criteria, in line with the polluter-pays principle.

The CJEU nevertheless considers the measure discriminatory, noting that the same environmental objective could be pursued “in a more complete and coherent manner, by levying an annual tax on any vehicle that entered into circulation in a Member State, which would not favour the national used-vehicle market to the detriment of placing into circulation used vehicles imported from other Member States (…)”.

Within Portugal itself, the environmental-protection justification had already been rejected time and again by national courts, following successive legal actions brought by various motorists.

Changes have already been made to ISV on imported used vehicles

In Portugal’s State Budget for 2021, the Government had already altered the formula used to calculate ISV on used vehicles imported from the European Union. The environmental element also began to factor in the vehicle’s age, although the tax reduction is not the same across the two components.

By way of example, if a vehicle aged five to six years is imported, the ISV reduction in the engine-capacity component is 52%, whereas the equivalent reduction in the environmental component is only 28%. This difference has prompted criticism from the automotive sector, which argues that the law still retains a discriminatory character.

Source: Court of Justice of the European Union.