For years, the German company Brenntag used a customs mechanism that allowed it to treat alcohol as passing through its tax warehouse, even when the goods never physically arrived there. The company relied on this so-called "onward transfer" mechanism until 2016, when the German Customs Office concluded that it did not satisfy the requirements of EU excise law. 

This triggered an excise duty assessment of more than EUR 62.6 million. The dispute eventually reached the Fiscal Court in Düsseldorf and, ultimately, the Court of Justice of the European Union (ECJ), which had to determine how far national governments may go in defining their own excise procedures.

Background of the Case 

In 2011, the German Customs Office granted the company authorization to store alcohol under a “duty suspension arrangement”, which allows postponement of excise duty payments on alcohol while the goods remain under customs and tax control. The key feature of the authorization was that Brenntag could use a German mechanism called “onward transfer,” regulated under the German Alcohol Tax Regulation.

Under the onward transfer mechanism, the alcohol moves directly from the company's suppliers to its customers in Germany. Importantly, from a legal perspective, the alcohol had first entered Brenntag’s tax warehouse and was then moved onward from there. This means that the movement is fictitious or deemed to occur through the company’s warehouse even though the goods never physically pass through it.

In 2016, the company purchased alcohol from suppliers in Belgium, Germany, France, and Poland and resold part of that alcohol to customers in Germany. At the same time, another company from the same corporate group, BCD Chemie GmbH, resold part of the alcohol to German customers. In practice, the alcohol was transported directly from the suppliers’ tax warehouses to final customers in Germany, either the company’s or BCD Chemie’s customers.

Importantly, most of the transport arrangements, except for five deliveries, were organized by the company itself. In those five cases, suppliers located in Belgium and Germany organized the transport. The suppliers prepared electronic administrative documents, an essential compliance requirement in the EU excise system, before the alcohol was transported under the duty suspension arrangement. 

In those documents, Brenntag was identified as the consignee, meaning the formal recipient of the alcohol. The documents also specified the actual delivery location as the premises of Brenntag’s German customers or the customers of BCD Chemie GmbH. The Tax Authorities validated these draft documents by assigning official reference codes before the transport began. After the alcohol reached the final customers, the company submitted acknowledgements of receipt to the Customs Office, confirming the completion of the deliveries. 

However, during the audit, the Customs Office concluded that the arrangements had not complied with the legal requirements governing movements under duty suspension. This resulted in an assessed excise duty of more than EUR 62.6 million against Brenntag for the 2016 transaction. The company challenged the assessment, but the Customs Office denied the appeal, stating that the company failed to comply with the legal requirements for using the onward transfer mechanism under the duty suspension arrangement.

The company then challenged the decision before the Fiscal Court. The Fiscal Court examined whether the excise duty assessments imposed by Customs were legally justified under the German rules governing duty suspension arrangements and the onward transfer mechanism. During this process, the Fiscal Court focused on two categories of transactions: deliveries in which Brenntag did not arrange the transport itself and cases in which the company submitted the required documentation too late.

The Fiscal Court determined that the dispute ultimately depends on whether the German rules governing the onward transfer mechanism are compatible with EU excise law. As a result, the Fiscal Court suspended the national proceedings and referred several preliminary questions to the Court of Justice of the European Union (ECJ).

Main Questions from Request For Ruling

The Fiscal Court raised two main legal issues concerning the compatibility of German excise duty rules with EU law. First, the Fiscal Court asked whether EU excise legislation prevents Germany from using the legal fiction in the German Alcohol Tax Regulation.

The second question concerned the principle of proportionality and excise duty exemptions under EU law. More specifically, the Fiscal Court asked whether EU countries may refuse an excise duty exemption purely because certain formal documentation requirements were not fulfilled.

Applicable EU Excise Duty Rules

The ECJ interpreted the relevant provisions from two EU Directives: Council Directive 92/83/EEC on the harmonization of the structures of excise duties on alcohol and alcoholic beverages and Council Directive 2008/118/EC concerning the general arrangements for excise duty.

German National Excise Duty Rules 

In addition to interpreting the provision from the German Regulation on excise duty on spirits, the ECJ also analyzed and interpreted key provisions from German Law on the monopoly on spirits.

Importance of the Case for Taxable Persons

The dispute between Brenntag and the German Customs Office is about the limits of EU countries to impose additional national excise procedures that create artificial taxable events. Defining this limit is essential, as without it, the EU countries may define when excise goods are considered delivered, released for consumption, or taxable. 

Analysis of the Court Findings

On the Legal Fiction of Onward Transfer

The ECJ began answering the first question by explaining the structure and purpose of the EU excise duty system under Directive 2008/118. In that context, the ECJ recalled that alcohol and other excise goods become subject to excise duty as soon as they are produced within the EU or imported into it. However, the excise duty does not become payable immediately, but only when the goods are released for consumption.

Additionally, the ECJ clarified how the duty suspension system works and noted that EU countries, by derogation from the general rule, may allow excise goods to be delivered directly to another place within their territory under duty suspension. This second location is known as the place of direct delivery and must be designated in advance by the authorized warehousekeeper in the destination country.

Notably, the ECJ concluded that Germany had not implemented this optional system of direct delivery. Instead, Germany relied on its own national mechanism, the fictitious onward transfer system. Another important rule clarified by the ECJ concerns when the movement of excise goods under a duty suspension arrangement begins and ends. 

Under Directive 2008/118, movement under duty suspension starts when the excise goods leave the tax warehouse of dispatch. Where excise goods are transported between tax warehouses under a duty suspension arrangement, the movement ends when the consignee has taken delivery of the excise goods. The ECJ added that while the Directive does not define the meaning of “taken delivery”, under established case-law, the decisive factor is the real, factual delivery of the goods, not a fictional or deemed receipt created by national legislation.

Concerning the concept of departure of excise goods from a duty suspension arrangement, the ECJ explained that it refers to the actual physical removal of the goods from the suspension regime, not merely to their sale or transfer of ownership. Therefore, as long as the excise goods remain physically stored in the tax warehouse of an authorized warehousekeeper and are under the duty suspension arrangement, excise duty cannot normally become payable.

Furthermore, the Directive allows EU countries to introduce simplified procedures for movements of excise goods under a duty suspension arrangement, but only where those movements take place entirely within the territory of that EU country. Therefore, the simplified procedure cannot apply to movements of goods transported from a tax warehouse in one EU country to customers or locations in another.

Regarding procedural requirements, such as documentation or monitoring arrangements, EU countries are not permitted to impose substantive rules governing when a duty suspension movement begins or ends, when goods are released for consumption, or when excise duty becomes chargeable.

On Documentation and Exemptions

Concerning the second question of whether Germany could deny an excise duty exemption because of missing or incorrect documentation, even where the alcohol was actually used for exempt commercial purposes, the ECJ first clarified that two different legal regimes were involved and should not be confused. 

The first is the duty suspension arrangement governed by Directive 2008/118, which regulates the movement of excise goods before excise duty becomes payable, and the second is the excise duty exemption under Directive 92/83, which depends on the nature and use of the alcohol itself. The ECJ added that the duty suspension system has strict procedural requirements. On the other hand, the excise duty exemption depends on substantive factors, such as whether the alcohol has been denatured or used for a purpose that qualifies for exemption.

The ECJ emphasized that if the available evidence shows that the substantive conditions for the exemption are fulfilled, the exemption must still be granted. In other words, documentary requirements serve to control and verify the correct application of the exemption, but they cannot override the transaction's actual economic reality.

However, the ECJ identified two situations in which a refusal of the exemption could potentially be justified. Those two situations are when the operator intentionally participated in tax evasion, tax avoidance, or abusive practices, and when the missing, late, or incorrect documentation made it impossible for the authorities to obtain reliable evidence proving that the alcohol was genuinely used for exempt purposes.

Court's Final Decision

The ECJ concluded that the relevant provision from Directive 2008/118 prevents EU countries from creating a legal fiction under which excise goods are treated as being received into an authorized warehousekeeper’s tax warehouse and immediately leaving that warehouse again when the goods never physically entered that warehouse.

The EU law also prevents EU countries from refusing an excise duty exemption solely because the documentation accompanying the movement of excise goods was missing, incorrect, or submitted late.

Conclusion

For Brenntag, the ECJ decision means that its position is largely correct and that the German Customs Office’s excise duty assessment was likely unlawful. For other taxable persons, the ruling reinforces that EU excise rules are based on the physical movement and actual use of goods, not purely formal national mechanisms.