61999C0070

I - Introduction

1. By this action for failure to fulfil obligations, the Commission is challenging provisions of Portuguese law under which intra-Community flights are subject to higher passenger-service and security taxes than those applicable to domestic flights.

II - Relevant legislation

A - Community law

2. Under Article 61(1) of the EC Treaty (now, after amendment, Article 51(1) EC), freedom to provide services in the field of transport is governed by the provisions of the Title relating to transport. Under Article 84(2) of the EC Treaty (now Article 80(2) EC), the Council may decide whether, to what extent and by what procedure appropriate provisions may be laid down for air transport.

3. On that legal basis, the Council adopted Regulation (EEC) No 2408/92 of 23 July 1992 on access for Community air carriers to intra-Community air routes. Article 3(1) of that regulation reads as follows:

Subject to this regulation, Community air carriers shall be permitted by the Member State(s) concerned to exercise traffic rights on routes within the Community.

B - Portuguese law

(1) Provisions relating to the passenger service tax

(a) Decree-Law No 102/91 of 21 March 1991

4. Decree-Law No 102/91 forms the legal basis for the levying of various taxes at the airports administered by the Portuguese State-operated company Empresa Pública Aeroportos e Navegação Aérea, ANA, E.P. Under Article 18 of the Decree-Law, the competent ministry fixes the rates of the taxes by ministerial decree. Under Article 30 of the Decree-Law, details relating to the various taxes may be laid down by regulatory decree.

(b) Regulatory Decree No 38/91 of 29 July 1991 (amended by Regulatory Decree No 24/95 of 12 September 1995)

5. Article 10(1) of Regulatory Decree No 38/91 provides for the introduction of a passenger service tax payable by every passenger checked in. A distinction is drawn in this regard between international flights and domestic flights.

(c) Implementing provisions

6. The actual rates of the passenger service tax payable at airports on the mainland and on the Azores respectively are fixed separately by Ministerial Decree (Portaria) No 555/95 of 8 June 1995 as follows:

Domestic flights PTE 580 (Lisbon, Oporto, Faro)

PTE 510 (Azores)

International flights PTE 1 550 (Lisbon, Oporto, Faro)

PTE 1 385 (Azores)

By Ministerial Decree No 310/97 of 12 May 1997, those rates were raised as follows:

Domestic flights PTE 591 (Lisbon, Oporto, Faro)

PTE 580 (Azores)

International flights PTE 1 619 (Lisbon, Oporto, Faro)

PTE 1 601 (Azores)

(2) Provisions relating to the security tax

(a) Decree-Law No 102/91 of 8 March 1991

7. Article 2(1) of Decree-Law No 102/91 governs the levying of a security tax on every passenger checked in. Article 2(2) provides that the rate of the tax is to be determined by the type of flight to be undertaken.

(b) Implementing provisions

8. By Ministerial Decree No 1172/92 of 22 December 1992, the competent ministries fixed the rates of the tax at PTE 200 for domestic flights and PTE 400 for international flights. A three-tier rate was then introduced by Ministerial Decree No 240/98 of 16 April 1998:

Regional flights PTE 250

Intra-Community flights PTE 550

International flights PTE 750

Regional flights are those between airports on the Portuguese mainland and airports in the autonomous regions of the Azores and Madeira, or between airports in those regions, or between those airports and other airports, in so far as they are classified by ministerial circular as regional flights.

Intra-Community flights are flights between the territory of the Portuguese State and the territory of any other Member State of the Community and between airports within national territory in so far as they are not regional flights.

International flights are those between the national territory and the territories of other States that are not members of the Community.

III - Procedure

9. By a letter of 11 December 1996, the Commission complained that higher passenger-service and security taxes were being levied on flights from Portuguese airports to Member States of the Community than on domestic flights. This, it argued, was incompatible with the freedom to provide services guaranteed in Article 59 of the EC Treaty (now, after amendment, Article 49 EC) and Article 62 of the EC Treaty (repealed by the Treaty of Amsterdam), with Regulation No 2408/92 and with the freedom of movement enjoyed by every citizen of the Community under Article 8a of the EC Treaty (now, after amendment, Article 18 EC).

10. In its letter of reply of 17 March 1997, the Portuguese Republic justified the different rates of tax by reference to the higher cost of handling passengers for international flights and the fact that the autonomous regions of the Azores and Madeira are a special case because they are islands.

11. On 30 June 1998, the Commission issued a reasoned opinion in which it reiterated that the Portuguese provisions were incompatible with Article 3(1) of Regulation No 2408/92, which introduced the principle of freedom to provide services in the field of air transport.

12. The Portuguese Government did not respond to the reasoned opinion. Nor were the contested provisions amended as the Commission had requested.

IV - Forms of order sought

13. On 26 February 1999, the Commission brought this action. It claims that the Court should:

(1) declare that

- by maintaining in force Article 10 of Regulatory Decree No 38/91 of 29 July 1991, under which flights from Portugal to other Member States are subject to higher taxes than those applicable to domestic flights, and

- by maintaining in force the provision in Decree-Law No 102/91 of 8 March 1991, as implemented by subsequent ministerial decrees, under which flights from Portugal to other Member States are subject to higher taxes than those applicable to certain domestic flights,

the Portuguese Republic has failed to fulfil its obligations under the combined provisions of Article 59 of the EC Treaty and Article 3(1) of Council Regulation (EEC) No 2408/92;

(2) order the Portuguese Republic to pay the costs of the proceedings.

14. The Portuguese Republic contends that the Court should:

(1) dismiss the action as unfounded;

(2) order the Commission to pay the costs.

V - Arguments of the parties

15. The Commission takes the view that the Portuguese provisions infringe Article 3(1) of Regulation No 2408/92, since Article 10 of Regulatory Decree No 38/91 and the combined provisions of Decree-Law No 102/91 and its implementing orders impose higher taxes on intra-Community flights than on domestic flights. Article 3(1) of Regulation No 2408/92, it contends, must be interpreted in a manner consistent with the principle of freedom to provide services enshrined in Article 59 of the EC Treaty.

16. In its submission, the scope of the provisions on freedom to provide services was extended to the field of air transport in 1992 by the third package of provisions on air transport, to which Regulation No 2408/92 belongs. The principle of freedom to provide services which therefore applies does more than merely prohibit discrimination on grounds of nationality; it renders inadmissible any restriction which is not justified by compelling reasons of public interest and which is not consistent with the principle of proportionality.

17. The Commission bases its interpretation of Community law on the Court's judgment concerning the application of the principle of freedom to provide services to maritime transport. In its judgment in Case C-381/93 in particular, the Court made it clear that, in the perspective of a single market and in order to permit the realisation of its objectives, freedom to provide services precludes the application of any national legislation which has the effect of making the provision of services between Member States more difficult than the provision of services purely within one Member State.

18. The Commission takes the view that the Portuguese Republic has not demonstrated any compelling reasons of public interest that satisfy the requirements laid down by case-law to justify the different rates of tax applicable to intra-Community flights and domestic flights respectively. It explains the differentiation by reference to the higher cost of international flights. As regards the security tax, however, no explanation is given as to why intra-Community flights require more expensive checking procedures. Nor has the Portuguese Government explained how a difference of 100% in the case of the security tax and of almost 300% in the case of the passenger-service tax is proportionate.

19. The fact that the legislation aims to promote the island regions of the Azores and Madeira, as Portugal contends, is not capable of justifying the tax regime at issue. That aim can also be achieved by means of direct compensation to the air carriers serving the relevant routes under Article 4(1)(f) and (h) of Regulation No 2408/92. Portugal already makes use of that possibility. Furthermore, the rules complained of go beyond what is necessary to attain the objective sought, because all national flights, not just those between the mainland and the island regions, are given preferential treatment.

20. The Portuguese Government points out first that, in order to challenge the landing charges at Portuguese airports, the Commission applied the procedure under Article 90(3) of the EC Treaty (now Article 86(3) EC) and addressed a decision to the Portuguese Republic. It finds it difficult to understand why, in this case, which is similar in substance to that just mentioned, the Commission has brought the matter before the Court of Justice straight away, even though court proceedings should be the last resort. Moreover, the Commission has not revealed what measures it has taken against other Member States with a comparable tax regime.

21. In its view, Article 3(1) of Regulation No 2408/92 governs only the principle of freedom of access to the intra-Community market in air transport. The Portuguese tax legislation does not restrict such access, but lays down conditions for the exercise of that freedom. Regulation No 2408/92 does not apply to such legislation.

22. The Community can lay down rules on the establishment of conditions of exercise only by means of a harmonising directive. The Commission's proposal of 23 April 1997 for a directive on airport taxes has not yet got beyond the draft stage, however. Singling out the Portuguese rules, it maintains, leads to distortion of competition.

23. The taxes on both security checks and passenger services are fixed for each passenger solely on the basis of his destination. No distinction is drawn according to the nationality or identity of the air carrier concerned. There is therefore no discrimination on the ground of the operator's nationality.

24. Even if the tax regime complained of does restrict the freedom to provide services, it maintains that such a restriction is justified since international transport necessitates special customs-clearance and transit facilities.

25. Moreover, since the distances on domestic routes are usually shorter and the air fares correspondingly lower, the lower taxes are appropriate.

VI - Assessment

(1) Choice of the action for failure to fulfil obligations

26. First, the Portuguese Government's argument that the Commission should have adopted a decision on the basis on Article 90(3) of the EC Treaty, instead of bringing the present action for failure to fulfil obligations, must be rejected. It falls within the Commission's discretion to determine whether and when to bring an action for failure to fulfil obligations against a Member State. The considerations which have led it to make that decision are not subject to judicial review. Consequently, if the Commission wishes to challenge the Portuguese legislation on passenger-service and security taxes by way of an action for failure to fulfil obligations but to take action against landing charges by means of a decision under Article 90(3) of the EC Treaty, it has discretion to do so. The Commission does not have to set out in detail the considerations which prompted it to act in this way. The Court of Justice examines merely whether the procedure chosen is in principle an admissible means of addressing the alleged infringement. It must be made clear in this regard that the action for failure to fulfil obligations which the Commission has chosen to bring is in any event an admissible procedure for the purpose of examining the compatibility with Community law of the Portuguese legislation on passenger-service and security taxes.

(2) Application to air transport of the freedom to provide services

27. The question is therefore whether the Commission's action is well founded. The Commission claims that there has been an infringement of Article 3 of Regulation No 2408/92 in conjunction with the principle of freedom to provide services. Under Article 61(1) of the EC Treaty (now, after amendment, Article 51(1) EC), freedom to provide services in the field of transport is governed by the provisions of the Title relating to transport. That restriction means that the objective laid down in Article 59 of the EC Treaty of abolishing during the transitional period restrictions on freedom to provide services is to be attained in the framework of the common transport policy provided for in Article 74 of the EC Treaty (now Article 70 EC) and Article 75 of the EC Treaty (now, after amendment, Article 71 EC). The Court has held that, even on expiry of the transitional period, Articles 59 and 60 of the EC Treaty (now, after amendment, Article 50 EC) are not of direct application in the transport sector.

28. In the context of air transport, Article 84(2) of the EC Treaty must also be taken into consideration. Under that article, the Council decides whether, to what extent and by what procedure appropriate provisions are to be laid down for air transport. The provisions on transport policy therefore apply to air transport only within the framework laid down by the Council.

29. On the basis of that provision, the Council adopted on 23 July 1992 Regulation No 2408/92 on access for Community air carriers to intra-Community air routes. Article 3, cited in point 3 above, grants Community air carriers the right to exercise traffic rights on routes within the Community.

30. The Commission takes the view that the freedom to provide services in the field of air services has been introduced in full. It bases that view, in particular, on the judgment of the Court of First Instance in Air Inter v Commission. The Portuguese Government, on the other hand, takes the view that Regulation No 2408/92 governs only access to traffic rights but not the exercise of such rights. The passenger-service and security tax legislation, however, relates to the exercise of traffic rights and is consequently not covered by Regulation No 2408/92. The question, therefore, is to what extent Regulation No 2408/92 makes the rules on freedom to provide services applicable to air transport.

31. The Court of Justice addressed this issue for the first time in Case C-361/98. With reference to the first, second and 19th recitals in the preamble to Regulation No 2408/92, it held that the purpose of that regulation was, inter alia, to define the conditions for applying in the air transport sector the principle of freedom to provide services so that all matters of market access were dealt with in the same regulation. In so doing, it endorsed the view expressed by Advocate General Cosmas in his Opinion in that case.

32. That view must ultimately be accepted. It is true that the wording of Regulation No 2408/92, or at least the operative part of it, contains no express reference to the provisions of Article 59 et seq. of the EC Treaty (now, after amendment, Article 49 et seq.). To that extent, the rules on air transport are less explicit than those on maritime transport, which the Commission cites by way of comparison. The relevant provision, Article 1(1) of Regulation (EEC) No 4055/86 applying the principle of freedom to provide maritime transport services between Member States and between Member States and third countries, reads as follows:

Freedom to provide maritime transport services between Member States and between Member States and third countries shall apply in respect of nationals of Member States who are established in a Member State other than that of the person for whom the services are intended.

33. That is a clear indication that the provisions on freedom to provide services are to apply to intra-Community maritime transport. Moreover, Article 8 of Regulation No 4055/86 transposes the provision contained in the third paragraph of Article 60 of the EC Treaty to the sphere of maritime transport. Finally, under Article 1(3) of Regulation No 4055/86, the provisions of Articles 55 to 58 and Article 62 of the EC Treaty (now Articles 45 to 48 EC, partially amended; Article 62 has been repealed) are to apply to maritime transport. On the basis of all those provisions of Regulation No 4055/86, the Court came to the conclusion that Regulation No 4055/86 made the freedom to provide services applicable in the sphere of maritime transport.

34. Regulation No 2408/92, on the other hand, refers to the provision of services only in the second recital in the preamble. That recital reproduces the content of Article 7a of the EC Treaty (now, after amendment, Article 14 EC), which defines the internal market. However, the second recital in the preamble to Regulation No 2408/92 must be read in conjunction with the first recital, which states that it is important to establish an air transport policy for the internal market over a period expiring on 31 December 1992. This means that Regulation No 2408/92 is intended to establish the internal market in the field of air transport. One of the features of the internal market is the guarantee of freedom to provide services, as is clear from Article 7a of the EC Treaty. The first two recitals in the preamble to Regulation No 2408/92 therefore indicate that the purpose of the legislature in adopting that regulation was to introduce freedom to provide services in the field of air transport.

35. Reference should also be made to the 19th recital in the preamble to the regulation, which reads: [w]hereas it is appropriate to deal with all matters of market access in the same regulation.

36. That recital relates to the rule contained in Article 3 of the regulation, which, as already mentioned in point 3, reads: [s]ubject to this regulation, Community air carriers shall be permitted by the Member State(s) concerned to exercise traffic rights on routes within the Community.

37. A comparison of the wording of Article 3(1) of Regulation No 2408/92 with that of Article 1(1) of Regulation No 4055/86, cited in point 32, shows that the rules on air transport are less explicit than those on maritime transport. However, the 19th recital and Article 3(1) of Regulation No 2408/92 support the conclusion that the legislature introduced freedom to provide services in the field of air transport at least in so far as market operators are granted access to the market in air services.

38. Further support for that interpretation can be found in the third recital in the preamble to Regulation No 2408/92, where Council Decision 87/602/EEC of 14 December 1987 and Council Regulation (EEC) No 2343/90 of 24 July 1990 are described as ... the first steps towards achieving the internal market in respect of access for Community air carriers to scheduled intra-Community air routes. It follows that Regulation No 2408/92 constitutes a further step towards the liberalisation of access to the market and thus to the establishment of the internal market.

39. Thus far, the Portuguese Government concurs with this interpretation of Regulation No 2408/92. It takes the view, however, that the regulation governs only access to, and not the exercise of, freedom to provide services in the field of air transport, that is to say the conditions under which traffic rights may be exercised and used. Regulation No 2408/92 did not, therefore, in its submission, introduce the freedom to provide services in the field of air transport generally, but only partially. National legislation on airport taxes that is applied without discrimination to national and Community carriers does not restrict the right of access to and use of traffic rights. To that extent, Community law has not been infringed.

40. The distinction which the Portuguese Government draws between the rules on access to traffic rights and the rules on the exercise of those rights does not, however, seem consistent with the content of the regulation. It is true that the title of the regulation, the third, 18th and 19th recitals in the preamble, and Article 1(1), Article 3(4) and Article 4(1)(d) refer to access to traffic rights. However, rules on the exercise of traffic rights are contained in Article 3(1), Article 4(1)(a), Article 8(2) and Article 9(1) of the regulation. The regulation therefore concerns both access to and exercise of traffic rights.

41. If, however, the regulation does lay down rules on both access to and the exercise of traffic rights, it must be seen as a comprehensive body of rules on freedom to provide services in the field of air transport. That interpretation is consistent with the objective of establishing an internal market in air transport set out in the first two recitals in the preamble. It follows that Regulation No 2408/92 introduced freedom to provide services in the field of air transport as a whole.

(3) The existence of a restriction on the freedom to provide services

42. Since it has been established that the principle of freedom to provide services applies in the field of air transport, it remains to be examined to what extent the Portuguese legislation to which the Commission objects restricts the freedom to provide services.

43. As the Court emphasised in the judgment in Mediawet, Article 59 of the EC Treaty precludes the application of national rules which, without objective justification, make it more difficult for a person providing services to make use of that freedom. The Court thus made it clear that the guarantee contained in Article 59 of the EC Treaty is more than a mere prohibition of discrimination on grounds of nationality. The Portuguese Government's objection that the contested provisions relate not to the nationality of the service provider but to the destination of the flight must therefore be dismissed as irrelevant.

44. According to case-law, a restriction on the freedom to provide services exists where the measure in question makes the provision of a service across borders more expensive than the comparable service provided nationally. The present case concerns air services and the taxes payable for the provision of such services in the context of passenger handling. The contested Portuguese rules impose on intra-Community flights higher passenger-service and security taxes than those applicable to domestic flights. In this respect, they make the cross-border provision of a service - for instance, a flight from Lisbon to Madrid - more expensive than a similar service provided nationally - for instance, a flight from Lisbon to Oporto - and therefore constitute a restriction on the freedom to provide services.

45. It can therefore be concluded for the time being that the contested national legislation concerning passenger-service and security taxes constitutes a restriction on the freedom to provide services.

(4) Justification of the restriction on the freedom to provide services

46. It therefore remains to examine the reasons put forward by the Portuguese Government to justify the difference in treatment as between intra-Community flights and domestic flights.

(a) Allocation of costs according to origin

47. The Portuguese Government submits by way of justification first that the taxes represent consideration for the use of facilities and personnel. The rates of the taxes were fixed on the basis of the necessary expenditure. With regard to the passenger service tax, it states that passengers on domestic flights require less space than those on international flights because there are no border formalities to complete (customs and passport control, accommodation for security and customs staff, separate passenger service facilities) and because there are no stopovers by transit passengers. The security tax, the Portuguese Government submits, represents consideration for use of the services provided by the security personnel and the associated use of certain items of equipment (such as X-ray machines and metal detectors).

48. In the judgment in Mediawet, the Court cited a number of public-interest reasons which are capable of justifying a restriction on the freedom to provide services. In subsequent case-law, it went on to summarise the conditions which such a restriction must meet, as follows:

- a restriction must be applied in a non-discriminatory manner;

- it must be justified by compelling reasons of public interest;

- it must be suitable for securing the attainment of the objective which it pursues; and

- it must not go beyond what is necessary in order to attain the objective.

49. There is no evidence that the Portuguese provisions result in discrimination against providers of services on account of their nationality. To that extent, the first of the above conditions is fulfilled.

50. The question arises, however, as to what extent the discrimination established is justified by reasons of public interest. The Portuguese Government contends first that the purpose of the tax regime at issue is the fair allocation of costs according to origin. In principle, there can be no objection to the graduation of costs according to their origin, since, under such a system, costs are allocated in accordance with an objective criterion. Where that is the case, however, regard must be had to the abovementioned case-law to the effect that the principle of freedom to provide services requires that tax rules should not subject cross-border services to a heavier tax burden than that applicable to comparable services provided nationally.

51. It should be emphasised in this connection that the Portuguese Government has not demonstrated how expenditure on services of the kind at issue here is in fact greater in the case of intra-Community flights than in the case of domestic flights. Nor has it furnished any actual figures to show which costs were used as the basis for fixing the rates of tax applicable to the various types of flight, or how far the taxes levied cover those costs. This in itself raises considerable doubts as to the factual accuracy of Portugal's case.

52. The arguments put forward by the Portuguese Government to justify higher passenger service taxes are unconvincing. In view of the rules applicable within the Community to the free movement of goods and persons and the provisions on checks on persons contained in the Schengen Agreement, to which Portugal has acceded, there is no reason for the expenditure associated with the handling of passengers for intra-Community flights to be any greater than for domestic flights. The Portuguese Government has not shown why levying a passenger service tax which is three times as high for intra-Community traffic as for national traffic is necessary in order to cover costs. If the rates of the passenger service tax were in fact proportionate to the expenditure necessary in each case, the rate for intra-Community flights would in any event have to be lower than that for international flights, where passport and customs checks have to be carried out in full. They are not, however, unlike the security tax rates. As far as the passenger service tax is concerned, intra-Community and international flights are treated in the same way.

53. Nor is it clear why the cost of security checks should vary according to the destination of the flight. The security risks and the precautions taken to avoid them are just as great on a domestic flight as they are on an intra-Community flight. Accordingly, checks on persons and luggage are in principle required to the same extent. This ground of justification must therefore be dismissed as well.

(b) Promotion of regional development

54. The Portuguese Government also submits that the lower taxes on regional flights are intended to promote the island regions of the Azores and Madeira. With regard to this argument based on the promotion of regional development, it must be observed first of all that, under Article 1(4) of Regulation No 2408/92, the autonomous region of the Azores was partially exempted from the application of that regulation. That exemption applied up to and including 30 June 1998. When it was ascertained that the amendments to the Portuguese legislation that would become necessary as from 1 July 1998 had not been drawn up, the Commission drafted a reasoned opinion on 30 June 1998. In the ninth recital in the preamble to Regulation No 2408/92, the exemption is justified by reference to the inadequate state of development of the air traffic system in the Azores. To that extent, the regulation already contains a measure to promote regional development.

55. Since 1 July 1998, Regulation No 2408/92 has been applicable to all Portuguese territory without restriction. It is therefore necessary to consider the extent to which Portugal's submissions concerning the promotion of regional development, over and above the aforementioned legislative exemption, are capable of justifying the different rates of tax.

56. Article 4(1) of Regulation No 2408/92 also makes provision for the possibility of promoting certain areas. Under subparagraph (a), a Member State may impose a public service obligation ... in respect of scheduled air services to an airport serving a peripheral or development region in its territory or on a thin route to any regional airport in its territory .... Under Article 4(1)(f) and (h), a Member State may reimburse an air carrier for satisfying such an obligation. Portugal has availed itself of that provision as well, in connection with air services both to the Azores and to Madeira.

57. Regulation No 2408/92 does not provide for any further form of promotion for regional development. In view of the fact that the text of the regulation itself lays down measures to that end, the promotion of regional development cannot at the same time be recognised as justification for restrictions on the freedom to provide services. The aforementioned provisions on the possibilities for promoting regional development under Community law must thus be understood as a definitive body of rules on the subject which precludes the recognition of further exemptions from the principle of freedom to provide services.

58. The Portuguese Government's submission that the tax regime at issue is justified on grounds relating to the promotion of regional development must also be rejected for the following reason. The preferential treatment which has been found to be accorded to domestic flights in the levying of passenger-service and security taxes applies not only to flights to and from the Azores and Madeira but to all domestic flights. However, according preferential treatment to flights between the three airports of Oporto, Lisbon and Faro cannot help promote regional development in the Azores and Madeira.

59. This ground of justification for the different rates of tax must therefore be dismissed as well.

(c) Proportionality of the taxes as a share of the total cost

60. Finally, the Portuguese Government contends that the lower taxes on domestic flights are proportionate to the shorter routes and lower fares on such flights.

61. This ground of justification must likewise be dismissed. It is true that taxes account for a larger share of the total price of a ticket for a cheaper flight than for a more expensive flight. To that extent, economic considerations could lead to a tax regime graduated according to the fare for the flight. The Court has held, however, that economic objectives do not in principle constitute grounds of public policy within the meaning of Article 56 of the EC Treaty (now, after amendment, Article 46 EC) that could justify different treatment according to whether services were provided nationally or across frontiers.

62. It must further be pointed out that the services for which those taxes are paid are provided irrespective of the length of the route or the amount of the air fare. For that reason also, the length of the route and the amount of the air fare do not constitute a compelling reason of public interest which is capable of justifying a differentiation in the rates of the passenger-service and security taxes.

63. Moreover, there are doubts as to whether the close link which the Portuguese Government alleges there to be between the length of the route and the amount of the air fare in fact exists. On the one hand, in terms of distance, flights within the Portuguese mainland are not always shorter than intra-Community flights. A flight from Lisbon to Madrid will be shorter than a flight from Lisbon to the Azores or Madeira. Yet the passenger service and security taxes for the shorter flight are higher than for the longer flight. This is an indication that the taxes are not in fact linked to the length of the route. On the other hand, it should be pointed out that, even if flights within Portuguese territory are by and large shorter than flights to other Member States, that does not necessarily mean that fares for domestic flights will be correspondingly lower than for intra-Community flights. As well as distance, the time of the flight and the demand for the air service are other potential factors determining the fare.

64. Finally, the objective of not making air fares disproportionately expensive can also be achieved without restricting the freedom to provide services. The same low rates of tax could be applied to intra-Community flights as are applied to domestic flights. In this way, the cross-border provision of services would be no more adversely affected than the provision of services nationally. At the same time, the rates of tax on domestic flights would remain unchanged.

65. Nor, therefore, can the difference in the tax burden as between domestic flights and intra-Community flights be justified by reference to the proportionality of the taxes as a share of the total cost.

66. To sum up, the grounds put forward by the Portuguese Government are not capable of justifying the restriction on freedom to provide services resulting from the system of passenger-service and security taxes at issue. The further question whether the restriction is proportionate is therefore irrelevant. The rules on passenger-service and security taxes therefore run counter to the freedom to provide services within the meaning of the combined provisions of Article 59 of the EC Treaty (now, after amendment, Article 49 EC) and Article 3 of Regulation No 2408/92.

VII - Costs

67. Under Article 69(2) of the Rules of Procedure, the unsuccessful party is to be ordered to pay the costs if they have been applied for in the successful party's pleadings. Since the Portuguese Republic has been unsuccessful in its submissions, it must be ordered to pay the costs, as applied for by the Commission.

VIII - Conclusion

68. For the foregoing reasons, I therefore propose that the Court should:

(1) declare that

- by maintaining in force Article 10 of Regulatory Decree No 38/91 of 29 July 1991, under which flights from Portugal to other Member States are subject to higher taxes than those applicable to domestic flights, and

- by maintaining in force the provision in Decree-Law No 102/91 of 8 March 1991, as implemented by subsequent ministerial decrees, under which flights from Portugal to other Member States are subject to higher taxes than those applicable to certain domestic flights,

the Portuguese Republic has failed to fulfil its obligations under the combined provisions of Article 59 of the EC Treaty (now, after amendment, Article 49 EC) and Article 3(1) of Regulation (EEC) No 2408/92;

(2) order the Portuguese Government to pay the costs of the proceedings.