Updated 6.45pm with government reaction below.

The European Court of Justice has ruled that Malta’s second-hand vehicle taxation system was in breach of EU law as cars purchased from other member states are taxed more heavily compared to domestic cars.

In a ruling on Thursday, the court found that Malta’s taxation scheme for motor vehicles registered before January 1, 2009 was incompatible with an EU law provision that prohibits taxes favourable to domestic products over imports from other member states.

In a reaction, the Finance Ministry said the issues raised by the judgement were already addressed by amendments to regulations on the annual circulation tax which came into force on January 1. 

Malta was taken to court in 2021 by the European Commission, which asked the court to rule on whether Malta failed in its obligations under EU law.

In its decision, the court found that Malta’s vehicle taxation system for second-hand motor vehicles was favourable to motor vehicles that are registered domestically, over those registered in other member states before 2009.

A provision of EU law prohibits national taxation systems that tax goods imported from other member states more than similar domestic products. This provision also prohibits the indirect favouring of domestic products over similar imported products.

It found that the annual circulation tax for motor vehicles that are registered in other member states before January 2009 and subsequently imported into Malta is fixed at a higher rate than that applied to vehicles registered before that date in Malta.

The rules had been put in place by the government in 2008 in a bid to protect local car import companies from far cheaper second-hand imports from the EU. 

In 2019, the European Commission sent a letter of formal notice to Malta, stating the national legislation laying down the framework for the annual circulation tax of second-hand motor vehicles was in breach of the EU provision. It followed this up with a formal court case filed in 2021.

Malta argued that the tax framework was based on the “polluter pays” principle, favouring newer, smaller and cleaner vehicles. Malta further argued that the proposed reformed ACT system would have adverse consequences for vehicle owners of second-hand vehicles registered in Malta before 2009 in that these vehicles would be devalued and the owners would be subject to a higher tax.

The Commission, on the other hand, emphasised that the relevant EU provision lays down an obligation on every member state not to impose unfavourable taxation systems on imported goods in favour of similar domestic goods.

The Commission further contended that Malta should amend the national legislation to equalise the annual circulation tax rates for motor vehicles registered in another member state and those registered in Malta before the relevant date.

In Thursday’s judgment, the court found Malta in failure of its obligations under EU law, affirming the purpose of the relevant EU provision in guaranteeing equality between internal taxation on national products and imported products, and the importance of this in EU competition law and the freedom of movement of goods.

The Court ruled that Malta’s annual taxation system could not be considered compatible with EU law since it was aimed at excluding imported products by way of a bigger tax than that imposed on domestic goods.

Government reacts: Issues have already been addressed

In a reaction to the court's decision, the finance ministry said amendments regarding the annual circulation tax (ACT) were made last May and entered into force on January 1 this year. The court case was filed before the amendments were passed and they were not been considered by the ECJ in its judgment.

As from January 1, Transport Malta introduced the previous registration tax and annual circulation licence fees for all used passenger vehicles and motorcycles which were registered in another EU member state (excluding the United Kingdom but including Northern Ireland) before 2009 and imported into Malta after January 1, 2024.

The new rules only apply to vehicles belonging to EU citizens resident in Malta (excluding vehicles imported from the UK by Maltese residents) that were imported after 2008 and registered as used sassenger vehicles. This includes motorcycles imported after 1 January 2009 which were registered in another EU country including Northern Ireland before 2009, with the intention to be registered in Malta.

"These now have the option to decide between which registration tax and annual circulation licensing regime to be registered and licensed under," the ministry said. 

"Owners of used passenger vehicles and motorcycles which were registered in another EU member state (including Northern Ireland and excluding UK before 2009) and were imported and registered in Malta after the 1 January 2009, currently under the post-2009 ACT regime, will have the option to re-assign their vehicle under the old regime (both in terms of registration tax and the annual circulation licence fees)."

The ministry said it was confident that the issues mentioned in the judgement had been adequately addressed.