EU Commission presents comprehensive proposal for reform of the Tobacco Tax Directive

On 16 July 2025, the European Commission presented a comprehensive proposal for the recasting of Directive 2011/64/EU (Tobacco Tax Directive). The recast Tobacco Tax Directive aims to fundamentally modernize the taxation of tobacco and related products. To this end, a number of new product categories will be introduced, taking into account new developments, market conditions, and public health challenges. The recast Tobacco Tax Directive is intended to apply from 1 January 2028.

Extension of the scope: Introduction of new product categories

A key element of the reform is the extension of the scope to new product categories. These include, in particular, e-liquids for electronic cigarettes (including nicotine-free ones), heated tobacco, nicotine pouches, and other nicotine-containing products without tobacco. These products have previously been either not taxed or taxed inconsistently at the national level. The European Commission is now proposing EU-wide harmonization to avoid distortions of competition and increase the effectiveness of public health measures. Raw tobacco will also fall under the directive in the future: the application of the Excise Movement and Control System (EMCS) is to be extended to raw tobacco. However, the proposed minimum tax rate will initially be zero euros. The new measures are intended to improve the traceability of tobacco and related products, make tax evasion more difficult, and facilitate the fight against illicit trade. The European Commission expects that the new control mechanisms could recover 10 to 20% of current tax losses (estimated at €13 billion annually). Currently, some member states already subject raw tobacco and tobacco waste to tobacco tax if the authorities deem them "smokable." In practice, this leads to extensive reporting obligations for the transport or transit of raw tobacco or tobacco waste within or through the tax territory of individual member states. The Commission's proposal to modernize the Tobacco Tax Directive also includes provisions for products that, by their nature, fall into more than one category, for example, both the definition of "heated tobacco" and "cigarettes." The European Commission's goal of preventing abuse, tax evasion, and illegal tobacco trade simultaneously leads to increased hurdles for the legal trade in tobacco products. The risks of unintentionally incurring excise duties due to errors in labor or inaccurate product classification are increasing. New basis for calculation: combination of nominal value and purchasing power. The current practice of setting minimum tax rates exclusively in nominal amounts is to be replaced, according to the European Commission's proposal, by a new mixed model. In the future, two-thirds of the minimum tax rate will be calculated in fixed euro amounts, and one-third based on the purchasing power of the respective Member State. A Price Level Index (PLI) will be calculated for each member state, taking into account purchasing power parity (PPP) within the EU. The fixed euro amounts will also be adjusted proportionally based on inflation, with inflation trends over the past three years being the determining factor. These adjustments to the minimum tax rates will be made every three years, ultimately considering both inflation and economic disparities between member states. The aim of the new model is to increase the effectiveness of the minimum tax rates, particularly in economically stronger member states where the existing rates have little steering effect. At the same time, the new system is intended to enable a fairer distribution of the tax burden. Health protection and tax harmonization as guiding principles: The reform of the Tobacco Tax Directive is closely linked to Europe’s Beating Cancer Plan, which aims for a tobacco-free generation by 2040. The European Commission emphasizes the role of taxation as one of the most effective instruments for reducing tobacco consumption – especially among young people. By harmonizing tax rates across different product categories (e.g., cigarettes, fine-cut tobacco, cigarillos, hookah tobacco), the tax-motivated substitution with cheaper products is to be prevented. The European Commission's proposal to reform the Tobacco Tax Directive marks the start of the legislative process at the European level. The next step involves discussions of the draft in the Council of the European Union and the European Parliament. The trilogue negotiations between the Commission, Council, and Parliament are of central importance in reaching an agreement on the final version of the directive. Only after the successful conclusion of these negotiations and the formal consent of all parties can the revised directive enter into force. Whether the European Commission's proposal will actually be implemented in its current form is therefore still uncertain. The negotiations between the three EU institutions could still result in extensive changes.