The European Court of Justice (ECJ) has held that the European Commission may refuse to recognize a company's relocation of production solely on the ground that the relocation was intended to escape customs duties imposed in connection with a trade dispute between two states — in this case, the United States (US) and the European Union (EU).

On 21 November 2024, the Fourth Chamber of the European Court of Justice delivered its ruling in Harley-Davidson Europe Ltd., et al. v European Commission.¹ The decision is now final, because the General Court of the ECJ has declined to hear an appeal.

Background

In June 2018, the Trump Administration imposed additional import tariffs of 25% on steel and 10% on aluminum. In response, the EU implemented countermeasures, including additional duties on motorcycles of US origin. In a Form 8-K, Current Report, filed with the US Securities and Exchange Commission (SEC), Harley Davidson announced that it would relocate the production of certain motorcycles destined for the EU from the US to its manufacturing facility in Thailand.

The relocation would, according to Harley Davidson, result in the motorcycles' being granted Thai origin, thereby exempting them from the additional EU duties. This was also confirmed by the Belgium customs authorities in a binding origin information (BOI). Subsequently, the European Commission ordered the Belgian customs authorities to revoke the BOIs. According to the European Commission, the relocation does not result in the imported motorcycles' being granted Thai origin due to the application of the so-called "anti-avoidance" provision outlined in Article 33 of the Delegated Act of the Union Customs Code (DA UCC).²

Article 33 DA UCC holds that any processing or working operation carried out in another country or territory shall be deemed not to be economically justified if it is established on the basis of the available facts that the purpose of that operation was to avoid the application of measures like additional import duties. This means that the production does not confer origin status, and depending on the composition of the input materials, the additional duties on US motorcycles may in this case still be imposed.

Harley Davidson subsequently sought annulment of the decision to revoke the BOI, initially at the General Court and now on appeal at the Court of Justice. Following the General Court's decision, the Court of Justice has also dismissed the claim.

ECJ considerations on application of anti-avoidance provision

The ECJ concluded that the anti-avoidance provision should be interpreted to apply if circumvention of the additional customs duties was the decisive factor in a decision to relocate production. There may be other considerations underlying the relocation, but if the primary or predominant purpose of the relocation is to circumvent the additional duties, the anti-avoidance provision applies. Whether the circumvention of the additional duties is the purpose must be determined based on objective factors, namely the available facts. The principal or dominant purpose for relocating production must be assessed, at the latest, at the time the decision was made to relocate.

The requirement to assess, based on objective factors, whether the primary or predominant purpose of the relocation is to circumvent the additional duties, marks a significant departure from prior legislation — the Community Customs Code (CCC),³ under which the purpose could be established by applying a presumption. In the present case, the ECJ considered that the SEC Form 8-K demonstrated that the relocation in question aimed to avoid the application of trade policy measures.

Anticipated trade tensions and significance of ECJ decision

On 5 November 2024, Donald Trump was elected the 47th President of the US and will officially take office on 20 January 2025. During his campaign, Trump stated his intention to impose tariffs of 10%-20% on all goods being imported into the US and targeting additional tariffs on countries like China (60%), Mexico (25%) and Canada (25%) as well as product-specific tariffs of 200% or higher. (See EY Global Tax Alert, United States President-elect discusses tariffs on Canada and Mexico, and additional tariffs on China, dated 27 November 2024.)

Should EU exports to the US be subject to additional tariffs of between 10-20%, the EU has already indicated that it would respond in kind.

The EU's retaliatory tariffs, put in place in retaliation for the S232 US tariffs on steel and aluminum, were only suspended until 31 March 2025 and therefore could be reimplemented, if necessary, on an accelerated basis. Since 2018, the EU has also developed a number of new trade defense tools that remain largely untested, such as the Anti-Coercion Instrument, Foreign Subsidies Regulation and Government Procurement Instrument.

Implications for businesses

As businesses look to prepare for possible US tariffs and retaliation by trading partners, actions to consider for companies that import into the EU include:

• Analyze both financial and physical flows, as well as the import duties spent, to assess the potential duty impact of anticipated new tariffs.
• If considering alternative sourcing decisions from US-origin products into the EU, ensure that the rationale for relocation is not primarily based on avoiding additional retaliatory customs duties.
• Conduct scenario-planning exercises to anticipate various outcomes of trade policy changes and develop contingency plans to ensure business continuity.