In its judgment of March 13, 2014 (case no. I FSK 443/13) the Supreme Administrative Court (NSA) found that the 2008 Act on Excise Tax serves to properly implement the Energy Directive (2003/96/EC) and that, accordingly, electricity used to sustain the process of heat and electricity co-generation is not excise tax-exempt.
Pursuant to Article 30 Section 6 of the Act of December 6, 2008 on Excise Tax, electricity used in the process of electricity generation as well as electricity consumed to sustain the electricity generation processes is exempted from excise tax, while Section 7 of this Article provides that the same exemption applies to electricity consumed in the process of heat and electricity co-generation.
This regulation does not, however, provide for excise tax exemption of electricity used to sustain the process of co-generation of heat and electricity.
The taxpayer proposed that electricity used to sustain the process of heat and electricity co-generation should be excise tax-exempt, pointing out that among the objectives of the Energy Directive (2003/96/WE) is,“encouraging behavior conducive to greater protection of the environment”. The EU legislator pointed to “combined heat and power generation” as a particularly preferred method of electricity generation and use, deserving preferential treatment by the Member States, as it serves to protect the Earth’s natural resources and the natural environment. The view prevailing in rulings of the Court of Justice of the European Union and reiterated in judgments handed down by courts in the various Member States is that functional (teleological) interpretation of EU laws is the fundamental method of determining the meaning of the EU legal norms, both as regards primary law and secondary legislation.
The NSA agreed with the taxpayer that teleological interpretation must prevail in the construal of EU laws but noted that such interpretation cannot be carried out entirely in abstraction from a straightforward reading of wording of the Directive. Article 14 of the Energy Directive provides for excise tax exemption of electricity used to produce electricity and electricity used to maintain the ability to produce electricity, while in Article 15 allows Member States allows Member States to exempt electricity used for combined heat and power generation from excise tax. What the Directive does not do is explicitly sanction or entitle anybody to subject electricity used to sustain the process of co-generation of heat and electricity to excise tax exemption. The NSA thus found the taxpayer’s position untenable and ruled that the electricity used to sustain the process of co-generation of heat and electricity is not excise tax-exempt.
The considered NSA judgment sends a clear signal to taxpayers that they cannot treat electricity used to sustain heat and electricity co-generation as excise tax-exempt. This conclusion, however irrational and inconsistent with the idea underlying the Energy Directive, is nevertheless rooted in its literal wording. The NSA’s conclusion is that Polish regulations implementing the Directive cannot provide for a range of excise tax exemptions wider than implied by the literal wording of the Directive. This in turn suggests that excise tax exemption of electricity used to sustain the process of heat and electricity co-generation ought to be sought not in Polish courts or in reliance on Polish laws but in the European Commission which must be persuaded to amend the Energy Directive accordingly.
This judgment must be borne in mind by taxpayers producing energy using co-generation processes who must make sure that their records enable a clear distinction between electricity used for combined heat and power generation and electricity used to sustain this generation. It is to be expected that the considered judgment will prompt tax authorities to closely scrutinize the applied excise tax exemptions and energy consumption records.