## Facts

- Italy imposed a higher internal tax on denatured synthetic alcohol (made from petroleum derivatives such as ethylene) than on denatured alcohol obtained by fermentation (made from agricultural products).
- At the relevant time, synthetic denatured alcohol was effectively not produced in Italy and was imported from other Member States, while fermentation alcohol was largely produced domestically.
- Chemial Farmaceutici marketed synthetic denatured alcohol and contended that the higher tax breached the EEC Treaty rule barring discriminatory or protective internal taxation.
- Italy defended the differential tax as an economic and energy-policy choice to favor agricultural inputs and discourage using ethylene for alcohol so it could be reserved for other industrial uses.
- A local Italian court stayed private proceedings between Chemial Farmaceutici and DAF and sought an interpretation of the Treaty rule on internal taxation through a preliminary reference procedure.

## Issues

1. Whether a Member State may impose higher internal taxation on denatured synthetic alcohol than on denatured fermentation alcohol when, in practice, the more heavily taxed product is imported and the less heavily taxed product is domestically produced.
2. Whether such a tax difference constitutes prohibited discrimination against imports (first paragraph) or impermissible indirect protection of domestic production (second paragraph).

## Decision

- The court held that Community law permits internal tax differentiation based on objective criteria (including raw materials and production processes) if the policy aim is compatible with the Treaty and the scheme avoids discrimination against imports and avoids protection of domestic goods.
- The heavier tax on denatured synthetic alcohol was not contrary to the Treaty’s internal taxation rule, provided the scheme is applied identically to imported products within each category and does not operate to protect domestic fermentation alcohol.
- The fact that the more heavily taxed product was, in practice, exclusively imported did not by itself establish unlawful discrimination or protection where the tax criteria were not tied to origin and the absence of domestic synthetic production resulted from the tax regime rather than an origin-based advantage.

## Legal Principles

- Member States retain discretion to structure internal taxes that differentiate between products using objective product-related criteria (e.g., inputs or production method).
- Differential internal taxation is lawful only if it (a) pursues an economic policy objective compatible with Treaty requirements and secondary law and (b) is designed and applied to prevent direct or indirect discrimination against imports and to prevent protection of competing domestic products.
- A tax does not become unlawful merely because, as a factual matter, the higher-taxed category is predominantly or exclusively imported; unlawfulness requires discrimination in law or in application, or a protective effect linked to the scheme’s structure.

## Conclusion

The court approved objective, origin-neutral internal tax differentiation and explained that a de facto heavier burden on imports is insufficient to violate the internal taxation rule absent discriminatory application or a protective structure favoring domestic competing goods.


Chemial Farmaceutici SpA v. DAF SpA, Case 140/79, 1981 E.C.R. 1 (C.J.E.U. 1981)