Ethanol as a sensitive product

Ethanol falling under CN codes 2207 10 and 2207 20 is listed in Annex 71-02 to Commission Delegated Regulation (EU) 2015/2446. It is therefore treated as a sensitive agricultural product for IP purposes.

Consequently, economic condition code 1 is not appropriate for ethanol. Code 1 applies to the processing of goods not listed in Annex 71-02 and will generally be appropriate for other, non-sensitive products covered by the same authorisation.

The application must therefore identify a separate and appropriate economic condition code for ethanol.

Contract processing – economic condition code 3

Where ethanol is processed under a contract-processing or tolling arrangement for a customer established outside the EU customs territory, the economic conditions may be deemed to be fulfilled under Article 167(1)(c) of Delegated Regulation (EU) 2015/2446.

The following conditions should be met:

  • the non-EU customer makes the ethanol directly or indirectly available to the authorisation holder;
  • the processing is carried out according to the customer’s instructions;
  • the processing is carried out for the customer’s account;
  • the non-EU customer remains the owner or economic risk-holder of the ethanol and the resulting processed product; and
  • the authorisation holder generally receives only a fee for storage, handling and processing, rather than purchasing and reselling the ethanol for its own account.

The relevant economic condition code is code 3. This code must be entered separately for each applicable ethanol commodity code in the IP application. It represents contract processing for and on behalf of a person established outside the EU customs territory. Dutch Customs Handbook – economic conditions and codes

The application should be supported by contracts, processing instructions, invoices and stock records demonstrating that the arrangement genuinely qualifies as contract processing.

Processing operation

The application should describe the intended processing operation in sufficient detail. For blending ethanol into petrol, the description may read:

Non-Union ethanol will be blended with petrol in accordance with the specifications and instructions of a customer established outside the customs territory of the Union. The customer will remain the owner and economic risk-holder of the ethanol and the resulting blended product. The authorisation holder will perform the storage, handling and blending activities for a processing fee.

Blending is a processing operation within Article 5(37) UCC and should be covered by an IP authorisation. It should not be treated merely as storage or, without careful verification, as a usual form of handling under customs warehousing.

The application should identify:

  • the ethanol input under CN codes 2207 10 and/or 2207 20;
  • the petrol or other components used in the blending operation;
  • the anticipated CN code and description of the processed product;
  • the expected blending ratios and rate of yield;
  • the processing locations and relevant tanks;
  • the method used to identify the ethanol in the processed products;
  • the proposed period for discharge; and
  • the intended methods of discharging the procedure.

Where the operation consists specifically of denaturing ethanol, economic condition code 20 may also be relevant under Article 167(1)(q). However, where the application is based on a genuine non-EU contract-processing arrangement, code 3 is the relevant basis for that arrangement. The correct code should always reflect the actual operation and commercial structure.

Calculation of import duty

The application must state how any import duty will be calculated if the processed product is released for free circulation in the EU.

For ethanol processed under economic condition code 3, the recommended approach is to request the exclusive application of Article 86(3) UCC. Under that provision, any import duty is calculated by reference to the tariff classification, customs value, quantity, nature and origin of the ethanol when it was originally placed under IP, rather than by reference to the processed product when released for free circulation.

This choice is also important for the economic-conditions analysis. Under the Article 86(3) route, contract processing under Article 167(1)(c) falls within the relevant exceptions and economic condition code 3 may be used without a Union-level examination of the economic conditions.

By contrast, where Article 85(1) UCC applies to ethanol subject to an agricultural policy measure, code 3 does not fall within the limited exceptions recognised for that calculation route. A Union-level examination of the economic conditions may therefore still be required.

For this reason, the application should generally avoid requesting flexible application of both Articles 85(1) and 86(3). It should instead state clearly:

The applicant requests that any amount of import duty arising in respect of the processed products be calculated exclusively in accordance with Article 86(3) UCC.

This point is relevant because the European Commission has specifically indicated that IP applications involving non-Union bioethanol used to manufacture biofuel are generally subject to examination of the economic conditions unless those conditions are deemed to be fulfilled under Article 167 of the Delegated Regulation. Dutch Customs Handbook – economic conditions

If the processed products are re-exported and the IP procedure is properly discharged, no import duty should normally become payable. The duty calculation method becomes particularly relevant if the processed product is ultimately released for free circulation in the EU.

Validity period

Because ethanol is listed in Annex 71-02, the validity of the IP authorisation may not exceed three years, pursuant to Article 173(2) of Delegated Regulation (EU) 2015/2446.

The authorisation holder should maintain an internal monitoring system to ensure that:

  • the three-year expiry date is recorded;
  • the continuing need for the authorisation is reviewed periodically; and
  • an application for renewal is submitted in good time.

Environmental and commercial background

Ethanol is commonly blended into petrol to replace part of the fossil component with a renewable component and to increase the octane rating of the finished fuel. Where the ethanol complies with the applicable sustainability and greenhouse-gas-saving criteria, its use may reduce the lifecycle greenhouse-gas intensity of the fuel and contribute to renewable-energy and transport-decarbonisation objectives.

The environmental benefit depends on factors including the ethanol feedstock, production process, transport chain and compliance with the relevant sustainability criteria. It should therefore be described as a potential lifecycle greenhouse-gas benefit rather than as an unconditional claim that every ethanol blend is environmentally superior.

Information and supporting documents

An IP application for ethanol should generally include:

  1. the applicant’s and authorisation holder’s details;
  2. the processing locations and authorised tanks;
  3. CN codes 2207 10 and/or 2207 20 for the ethanol;
  4. descriptions and CN codes of the processed products;
  5. a detailed description of the blending, denaturing or other processing operation;
  6. the expected rate of yield and processing losses;
  7. the period requested for discharge of the procedure;
  8. the proposed customs offices of placement and discharge;
  9. details of the customs records and stock-accounting system;
  10. details of the customs guarantee;
  11. the requested duty-calculation method under Article 86(3) UCC;
  12. economic condition code 3, where contract processing applies;
  13. evidence that the customer is established outside the EU customs territory;
  14. the tolling or processing agreement;
  15. evidence that the customer retains ownership or the economic risk;
  16. processing instructions and product specifications;
  17. evidence that the processor receives a service or processing fee; and
  18. an explanation of how the IP procedure will be discharged.

In summary: an IP application involving ethanol must treat ethanol separately from ordinary non-sensitive products. Code 1 is not applicable because ethanol is listed in Annex 71-02. Where the ethanol is processed for and on behalf of a non-EU customer under a genuine toll-processing arrangement, the appropriate economic condition is generally code 3, in combination with the exclusive application of Article 86(3) UCC and a maximum authorisation period of three years.