In the landmark Siebrand ruling (F&B sector), the ECJ decided that certain alcohol-based beverages, which previously were classified under heading 2206 of the CN (Combined Nomenclature), must now be classified under heading 2208 (attracting a higher excise duty rate). The criteria put forward in Siebrand seemed to open the door to operators classifying their products. The new preliminary questions in the Toorank Productions case (ECJ Toorank, C-532-14 & C-533-14) indicate, however, that there are still some uncertainties.
The Siebrand judgement contained three practical guidelines for the classification of certain alcohol products (see 35 to 38 of the judgement). The guidelines are as follows:
- it has to be established which kind of alcohol (fermented or distilled) contributes more to the total alcohol content (alcoholic strength by volume) of the product, eventually contributing even more to the total volume by weight of the product. This criterion must not be regarded as a single demarcation line but as a starting point for further investigation into the objective characteristics and properties of the product
- it has also to be established whether the particular organoleptic (i.e. taste, sight, smell) characteristics of the products correspond to those of products classified in CN code 2208. The taste can constitute an objective characteristic or property of a product. If the addition of water and other substances (such as syrup, various aromas and colourings, and, in some cases, a cream base), results in a loss of taste, smell and appearance of a beverage produced from a particular fruit or natural product, (that is to say a fermented beverage of CN code 2206), then the classification falls into the CN code 2208 category, and the product falls within the "spirits" category for the purposes of excise duty.
- the final consideration is that of the intended use of a product which may constitute an objective criterion for classification if it is inherent to the product. That inherent character must be capable of being assessed on the basis of the product's objective characteristics and properties including the form, colour and name under which it is marketed. If they correspond to those of a spirituous beverage, classification in CN code 2208 takes place as well.
The Dutch Supreme Court has again referred preliminary questions to the European Court of Justice (ECJ) with regard to the classification of the below products itemized below:
- beverages that are based on fermented alcohol to which distilled alcohol is added (C-532/14)
- beverages that are based on fermented alcohol to which no distilled alcohol is added (C-533/14) and
- beverages based on fermented alcohol, to which no distilled alcohol is added and to which sugar has been added (C-533/14).
ECJ case C-532/14
ECJ case C-532/14 concerns the excise tariff rate that is to be applied to alcoholic beverages that are based on fermented alcohol, known as Ferm fruit, to which distilled alcohol, sugar (syrup), milk, fats and various aromas are added. The alcohol percentage is in total 13.4%. At least 51% of the alcohol consists of fermented alcohol. The fermented alcohol is cleared by means of ultrafiltration and has therefore a neutral taste, color and smell. The Tax Court considered the beverage as a liqueur, to be classified under CN code 2208 7010, upon which the high excise rate of distilled alcohol is due.
The Supreme Court refers to the Siebrand case (C-150/08 of 7 May 2009) where the ECJ ruled that, in order to determine the essential character of a beverage, not only the specific organoleptic characteristics of the product and its inherent destination, but also the amount of distilled alcohol in comparison to fermented alcohol must be taken into account. The question now, is how to explain the findings of the ECJ in order to determine whether a beverage satisfies the essential character of a beverage that is classified in CN heading 2208.
The Supreme Court decided to refer the following questions to the ECJ for a preliminary ruling:
Should heading 2206 of the CN be interpreted as meaning that a beverage with an alcoholic strength by volume of 13.4% vol., obtained by mixing a purified, alcoholic beverage (base) known as ‘Ferm Fruit', obtained by fermentation from apple concentrate, with sugar, aromatic substances, colouring and flavouring agents, thickening agents, preservatives and distilled alcohol - in the sense that that alcohol does not exceed, either in volume or in percentage, 49 per cent of the alcohol occurring in the beverage, whereas 51 per cent thereof consists of alcohol obtained by fermentation - should be classified under that heading?
If not, should subheading 2208 70 of the CN be interpreted as meaning that a beverage such as that should be classified as liqueur under that subheading?
ECJ case C-533/14
ECJ case C-533/14 concerns a beverage called Ferm Fruit (the base drink) with an alcohol percentage of 16%. This beverage is prepared with sugar syrup, demineralized water, apple concentrate, minerals and vitamins. After mixing, pasteurization takes place and wine yeast is added, as a result of which, the product becomes an alcoholic product.
The alcoholic product is cleared by means of, among other things, ultrafiltration and has, therefore, a neutral taste, color and smell. It does not contain distilled alcohol.
This alcoholic beverage is suitable for human consumption and not destined only for the preparation of consumer products.
The Tax Court considered the base drink (Ferm Fruit) as a beverage which is prepared by means of fermentation and that must be classified in CN heading 2206, as a result of which the (lower) excise rate of mediate products applies.
Other products that are subject of the procedure, are manufactured on the basis of the above mentioned Ferm Fruit product. These products have an alcohol percentage of 14%. They are prepared by adding sugar, aromas, colorings, flavors, thickeners, preservatives and a cream (base) to the Ferm Fruit product. No distilled alcohol is added.
The Tax Court considered the drinks,manufactured from the base drink, to be alcoholic beverages under CN heading 2208, as a result of which the high excise rate of distilled alcohol was due.
The Supreme Court refers to ECJ's Siebrand case, and asks why the CN heading 2206 was designated for the classification of a fermented beverage that does not have the taste, smell, colour and appearance of a beverage and that is manufactured out of a certain fruit or natural products. The only CN heading that seems suitable for the classification is 2208, but the product is not a distilled beverage and does not contain any distilled alcohol. The wordings of CN heading 2208 [...spirits, liqueurs and other spirituous beverages...] suggest that CN heading 2208 applies only to beverages, including liqueurs, that contain distilled alcohol.
Further the Supreme Court considers beverages with a relative low percentage (14) of alcohol, that contain sugar but no distilled alcohol, to be a mismatch with liqueurs or other distilled beverages that in general contain a relatively high percentage alcohol content.
The Supreme Court, therefore, decided refer the following questions to the ECJ:
Should heading 2206 of the CN be interpreted as meaning that a beverage known as ‘Ferm Fruit', obtained by fermentation from apple concentrate, which is also used as a beverage base for the production of a variety of other beverages, which has an alcoholic strength by volume of 16% vol, which, as a result of purification (including ultrafiltration) is neutral with regard to colour, smell and taste, and to which no distilled alcohol has been added, must be classified under that heading? If not, should heading 2208 of the CN be interpreted as meaning that such a beverage must be classified under that heading?
Should heading 2206 of the CN be interpreted as meaning that a beverage with an alcoholic strength by volume of 14% vol, obtained by mixing the beverage (base) described in question 1 above with sugar, aromatic substances, colouring and flavouring agents, thickening agents and preservatives, and which does not contain any distilled alcohol, must be classified under that heading? If not, should heading 2208 of the CN be interpreted as meaning that such a beverage must be classified under that heading?
What can this mean for business?
After the ECJ Siebrand case, it seemed generally accepted that products could be classified on basis of their content. The abovementioned Toorank Productions cases, however indicate that there remain uncertainties with the classification of alcoholic beverages. Manufacturers of similar products who currently classify their products in CN heading 2208 (and consequently pay the high excise duty rate) should be alert to this issue and take steps to safeguard their legal rights.