Exemptions from the Tax on Oil Products

Although there is growing concern about decarbonising the economy and transitioning to a green economy, there are still several sectors of activity, of great economic and social relevance, that need oil and its derivatives to produce the products we use in our daily lives. To give just a few examples, the textile, paper and glass industries need fuel derivatives to operate, and there are currently no substitutes that would allow these sectors to continue operating at the same level of productivity.

In Portugal, exemptions from Tax on Oil and Energy Products have undergone several phases. Until 1991, Portuguese legislation did not provide for exemptions from Tax on Oil Products, but from 1991 onwards, it began to provide for exemptions that can be grouped into exemptions for goods intended for embassies, diplomatic missions, consulates and their agents; for consumption by foreign armed forces stationed in Portugal; for the supply of fishing and coastal navigation vessels, excluding sports or recreational vessels; for consumption in the production of electricity or town gas and for technical uses, except as motor fuel. Later, reduced taxation was also introduced for diesel used in agriculture.

Another important milestone occurred with the creation, in 1992, of the common Community framework for excise duties, established by Council Directive 92/12/EEC of 25 February 1992 and the so-called vertical directives, in particular with regard to the Tax on Oil Products, Directive 92/81/EEC of 19 October 1992 on the harmonization of the structures of excise duties on mineral oils and Council Directive 92/82/EEC of 19 October 1992 on the approximation of the rates of excise duties on mineral oils.

In 1994, as a result of the transposition of Directive 92/81/EEC, Portuguese legislation began to provide for exemptions for fuels proven to be intended for use in air navigation or public transport.

Community legislation provided for three types of exemptions: (i) mandatory exemptions; (ii) optional exemptions; and (iii) exemptions permitted for certain Member States.

Mandatory exemptions covered the supply of fuel in the context of diplomatic and consular relations, to foreign armed forces stationed in a Member State; use of products as raw materials; use in air navigation and navigation in Community waters, including fishing; use of products subject to excise duty for injection into blast furnaces for the chemical reduction of coke used as the main fuel and fuels contained in the tanks of motor vehicles travelling within the European Union.

With regard to optional exemptions, article 8 of Directive 92/81/EEC provided for several optional exemptions, which could be adopted by Member States in accordance with the specific characteristics of each Member State. In the case of Portugal, only the following optional exemptions were adopted: (i) consumption of mineral oils for the production of electricity or electricity and heat; (ii) consumption of motor fuels for use in inland waterway transport; and (iii) reduced rate for agricultural diesel.

Finally, Article 8 (4) of Directive 92/81/EEC allowed the Council, on a proposal from the Commission, to authorise Member States to introduce other exemptions or reductions in the rate of duty for specific policy considerations.

Portugal also made use of this prerogative, obtaining authorisation to exempt liquefied petroleum gas used as fuel when consumed by public transport; to exempt private recreational aviation; and to apply a zero rate to mineral oils obtained from the treatment of waste oils or residues.

Directive 2003/96/EC subsequently revoked Directive 92/81/EEC, establishing mandatory exemptions, optional exemptions and, finally, the possibility of differentiated rates. In summary, it can be said that Directive 92/81/EEC provided for a limited number of optional exemptions, which required Member States wishing to pursue certain specific objectives through exemptions to seek prior authorization from the Council. The entry into force of Directive 2003/96/EC on the taxation of energy and electricity enabled Member States to grant exemptions / reductions for reasons arising from specific policies. Within these optional exemptions, a distinction had to be made between cases where exemptions had to comply with the minimum levels of taxation laid down in Directive 2003/96/EC and those where the Directive allowed for a reduction in tax below the minimum levels or even total exemption.

We shall now focus on the specific exemptions provided for in the Portuguese Excise Duties Code and in article 89 thereof, which regulates these exemptions.

The general rule of Article 89 (1) (a) of the Excise Duties Code is that all oil products intended for use for purposes other than as motor fuel or heating fuel, with the exception of lubricating oils, are exempt from Petroleum Products Tax, with the other subparagraphs establishing situations in which products, despite being intended for use as motor fuel or fuel, are exempt from Tax on Oil Products.

Thus, the following are also exempt from oil tax products used in air navigation, with the exception of private recreational aviation; used in coastal and inland waterway transport, including fishing and aquaculture, with the exception of private recreational boating, in relation to products classified under CN codes 2710 19 43 to 2710 19 48, 2710 20 11 to 2710 20 19, 2710 19 62 to 2710 19 67, 2710 20 32 and 2710 20 38.

The Excise Duties Code also provided for total exemption from Oil Tax for products used in the production of electricity, electricity and heat (cogeneration), by entities whose main activity is the production of electricity and heat (cogeneration), with regard to products classified under CN codes 2710 19 62 to 2710 19 67 and 2710 20 32 to 2710 20 38, under CN code 2711, as well as products classified under CN codes 2710 19 43 to 2710 19 48 and 2710 20 11 to 2710 20 19, consumed in the Autonomous Regions of the Azores and Madeira. However, this exemption has been progressively eliminated, and fuel oil is now taxed at 100%, plus a 100% addition on CO emissions, and natural gas (CN 2711), with the exception of the Autonomous Regions of Madeira and the Azores, is taxed at 50% of the Tax on Petroleum Products and 50% of the surcharge. Similarly, with the entry into force of the State Budget for 2025, products classified under CN codes 2707 99 99, CN 2710 19 43 to 2710 19 48, CN 2710 20 11 to 2710 20 19, CN 2710 19 62 to 2710 19 67, CN 2710 20 32 and 2710 20 38, consumed in the Autonomous Regions of the Azores and Madeira and used in the production of electricity, electricity and heat (cogeneration), or town gas, by entities whose main activity is one of these, are taxed at a rate corresponding to 100% of the rate of the Tax on Petroleum and Energy Products and at a rate corresponding to 100% of addition on CO emissions (index 2).

Oil and energy products used in installations subject to an energy consumption rationalisation agreement, with regard to energy products classified under CN codes 2701, 2702, 2704, 2713 and 2711 12 11, and fuel oil with a sulphur content of 0.5 % or less, classified under CN codes 2710 19 62 and 2710 19 66, are taxed at a rate corresponding to 100 % of the CO emissions surcharge (index 2).

The only exception is the maintenance of total exemption for those products when used in installations covered by the European Emissions Trading Scheme (ETS), including those covered by the optional exclusion provided for in the ETS.

The following products are also exempt from Tax on Oil Products: i) those contained in normal tanks and special containers of motor vehicles coming from other Member States; ii) used in the transport of passengers and goods by rail, in relation to products classified under CN codes 2710 19 43 to 2710 19 48 and 2710 20 11 to 2710 20 19;

iii) are used by economically vulnerable end customers who are beneficiaries of social tariffs, in accordance with the applicable legislation, in relation to natural gas classified under CN codes 2711 11 00 and 2711 21 00.

Electricity is also exempt from tax if it can be proven that it is:

i) Used to produce electricity and to maintain the capacity to produce electricity;

ii) Produced on board vessels;

iii) Used for the transport of passengers and goods by rail, underground or tram, and by trolleybus;

iv) Used by economically vulnerable end customers who are beneficiaries of social tariffs, in accordance with the applicable legislation;

v) Used in the facilities referred to in point f) of the previous paragraph.

vi) Used in public passenger transport, with regard to products classified under CN code 2711;

vii) Used in facilities subject to the European greenhouse gas emission allowance trading scheme (ETS) or an energy consumption rationalization agreement (ARCE), with regard to energy products classified under CN codes 2701, 2702, 2704 and 2713, fuel oil with a sulphur content not exceeding 0.5 % by weight, classified under CN codes 2710 19 62 and N CN 2710 19 66, and products classified under CN code 2711, with the exception of entities whose main activity is the production of electricity, electricity and heat (cogeneration);

viii) Contained in standard tanks and special containers of motor vehicles coming from other Member States;

ix) Used for the transport of passengers and goods by rail, in relation to products classified under CN codes 2710 19 43 to 2710 19 48 and 2710 20 11 to 2710 20 19;

x) Used by economically vulnerable end customers benefiting from social tariffs, in accordance with the applicable legislation, in relation to natural gas classified under CN codes 2711 11 00 and 2711 21 00.