Constantin Schwabiy, Victor Proshkin, Vitaly Lomakovich. Excise duty on tobacco and nicotine-containing products: awaiting revision of European harmonized standards. GROWFORD Institute, 2026. https://www.growford.org.ua/en/research/excise-duty-on-tobacco-and-nicotine-containing-products-awaiting-revision-of-european-harmonized-standards/
The current excise taxation of traditional tobacco products in the EU, the practice of applying transitional periods to reach the current EU minimum excise duty on cigarettes, and approaches to the excise taxation of heated tobacco products in EU countries and Ukraine were examined. The changes proposed by the initiative to revise Council Directive 2011/64/EU were analyzed, with particular emphasis on the risk that their implementation could fuel the spread of illicit cigarette trade. The consequences of a sharp versus a gradual increase in the minimum excise duty on cigarettes in Ukraine were modeled. Proposals were developed to soften a number of requirements for the future excise taxation of tobacco and nicotine-containing products in the EU and to introduce appropriate excise duty rates in Ukraine.
EXECUTIVE SUMMARY
Excise taxation of cigarettes and other traditional tobacco products in EU countries: status quo
EU rules on excise taxation of tobacco products are currently defined by the Council Directive 2011/64/EU of 21 June 2011 on the structure and rates of excise duty applied to manufactured tobacco (codification). Mentioned Directive covers cigarettes, cigars and cigarillos, smoking tobacco, but does not cover novel products – heated tobacco (electrically heated tobacco products, HTPs), liquids for electronic cigarettes (e-liquids), nicotine pouches, which appeared on the market after its adoption and were not included within its regulatory scope.
According to the Council Directive 2011/64/EU, the total amount of the excise duty on cigarettesmust be at least 60% of the weighted average retail selling price. At the same time, this amount (minimum excise duty on cigarettes) must not be less than 90 euros per thousand units.
The Council Directive 2011/64/EU establishes the principle according to which different duty rates can be applied for each category of tobacco products, but the highest rate is defined for cigarettes.
Today, the difference between the lowest EU minimum excise duty on cigarettes in Bulgaria and the highest in Ireland is about five times. At the same time, all EU countries have already “outgrown” the “90 euros” rule.
What were the challenges in achieving the current European minimum excise duty on cigarettes and how were they overcome?
Even 10-15 years ago the situation was different. Despite the fact, that the minimum excise duty on cigarettes in the EU was increased to 90 euros per thousand units in 2014, the Council Directive 2011/64/EU regulated exceptions for Bulgaria, Greece, Estonia, Latvia, Lithuania, Poland, Romania and Hungary, which were allowed to meet this standard by 2018. Bulgaria, Lithuania, Hungary and Croatia made the corresponding changes within the maximum time frame.
The schedules of excise increase on cigarettes in Central and Eastern European countries upon accession to the EU have been drafted for a long period, sometimes for 13-14 years. In addition, in case of spread of illicit trade in tobacco products, governments quickly reacted by suspending or slowing down tax increase. The illicit cigarette market “exploded” in Bulgaria, Latvia, Lithuania and Hungary after too sharp increase of the minimum excise. This confirms the critical need for a transitional period to implement the “90 euros” rule.
An increase of the level of illicit cigarette trade with an increase in their excise duty rates was also seen in Ukraine. Despite the fact that the government introduced the schedules of the tax rates changes. The first seven-year plan introduced the increase of the minimum excise duty on cigarettes by 20% per year until 2025 (except for 2018, when the rate increased by 30%). In 2018-2025, such excise duty increased from 773.2 to 3019.85 hryvnias per thousand units, which, taking into account the exchange rate at that time, corresponded to the level of 90 euros.
The increase of the minimum excise duty was accompanied by a decrease in the consumption of legal cigarettes in Ukraine from 65.1 billion units in 2017 to 26.4 billion units in 2025 and by a surge in illicit trade of such products from 2.3% in 2017 to 21.8% in 2023. In 2024, coordinated actions by the authorities, control bodies, and law enforcement agencies ensured a significant reduction of the illicit cigarette market to 16.1%, but during 2025, tobacco criminals could again partially expand their sphere of influence.
On March 25, 2025, has not yet been fully implemented plan of the excise duty increase on tobacco products in Ukraine for 2018-2025 was replaced by a new four-year schedule in euro, according to which in 2025 the minimum excise duty on cigarettes must be 78 euros per thousand units, in 2026 – 82 euros, in 2027 – 86 euros, reaching eventually 90 euros in 2028. In addition, as in 2024 the excise burden on cigarettes at the weighted average price did not reach the level of 60%, a norm came into force, which increased the minimum excise duty by 10% to 85.8 euros per thousand units from April 1 to December 31, 2025.
Approaches to excise taxation of heated tobacco in EU countries and Ukraine
Since the Council Directive 2011/64/EU does not cover heated tobacco products, EU countries can independently choose their approaches regarding defining the relevant excise duty. The European Commission recommended taxing these products at the same rate as it is applied on other smoking tobacco.
Currently, most EU countries (19) apply the excise duty on heated tobacco products per kilo of tobacco weight, and all member states have a lower excise duty on HTPs compared to cigarettes. In 2025, among 24 countries analyzed by us the ratio of the excise duty on heated tobacco and cigarettesranged from 82.4% in Estonia to 15.9% in Hungary, while the average value of the mentioned indicator in the EU was 52.0%. Spain, Germany and Portugal were not included to our sample, whose HTPs systems taxation do not allow to make correct comparisons.
In Ukraine, in 2016-2020 heated tobacco was taxed as an excise category of “tobacco substitutes”, the excise rate for which is several times lower than for cigarettes. In 2021, the excise duty on HTPs became identical with the minimum excise duty on cigarettes, which from 2022 was accompanied by a reduction and then by a slow growth of the market of these novel products.
On March 25, 2025, the minimum excise duty on cigarettes increased to 78 euros per thousand units, and the excise rate on HTPs increased to 70.4 euros; the differentiation of the excise burden on these types of products was less than 10%. In addition, an increase in the excise duty rates for 2026-2028 was foreseen. The minimum excise duty on cigarettes will increase at a rate of about 5% per year in euros. The excise duty rate on HTPs should increase to 72 euros in 3 years. The changes mentioned are in line with the practice of EU countries. Starting from 2028, the excise duty differential on heated tobacco and cigarettes in Ukraine will be only 20%.
HTPs market in Ukraine is developing totally in the legal segment, which confirms the increase of the excise duty amount paid from such products, which in 2025 amounted to 18.5 billion hryvnias. In return, the market of liquids for electronic cigarettes, which are becoming increasingly popular, is more than 90% illicit; e-liquids excise revenues amounted to about 0.5 billion hryvnias. In wartime, it is especially important that the consumption of HTPs ensures the payment of all taxes stipulated by legislation.
Initiative to revise Council Directive 2011/64/EU
On 16 July 2025, the European Commission published the Proposal for a Council Directive on the structure and rates of excise duty applied to manufactured tobacco and tobacco related products (recast) (hereinafter referred to as the Proposal). The document presents changes of the required minimum excise rates that should come into force from January 1, 2028, and some of them – in 2029-2032.
Considerable attention has been paid to revision both the rate of the minimum excise rates and the approach to their setting. In particular, from 2028 the minimum excise duty rate on cigarettes should increase to 215 euros per thousand units and be adjusted to the price level index. This means that the single minimum rate at the EU level will be replaced by its national analogues, while defining which will be considered the economic situation in the countries by adjusting the base rate on the Price Level Index (PLI) of the countries. PLI is calculated by Eurostat. 2/3 of the tax rate will be fixed, 1/3 will be adjusted based on the purchasing power parity of the countries.
Considering PLI for 2024, for Bulgaria the minimum excise duty on cigarettes will be 186.1 eurosper thousand units. In return, in Denmark this excise duty will be 245.9 euros per thousand units.
The tax increase will also affect other traditional tobacco products. The excise duty rate on cigars and cigarillos will increase the most – in 2028-2032 the excise burden should increase by 12 times. Starting from 2030, nicotine pouches will be taxed at the same excise rate as other smoking tobacco and other processed tobacco.
From January 1, 2032, the minimum excise duty rate on heated tobacco will be 55% of the retail price or 108 euros per thousand units (155 euros per kg). The rates will be adjusted on PLI. The minimum excise burden on heated tobacco products in the EU will be half of cigarettes. The harmonization of excise duty on heated tobacco also provides for a transitional period during 2028-2031. A gradual transition to higher rates is proposed to avoid abrupt structural changes in the tobacco market.
According to the Proposal provisions, already from 2028, two excise duty rates will be applied on liquids for electronic cigarettes in the EU depending on their nicotine content, which should be defined as a percentage of the retail price or as a fixed amount per 1 ml. Nicotine-free e-liquids will be included to the scope of the directive to limit tax evasion through “self-mixing” (when nicotine is added by consumers to nicotine-free liquids). Differentiated excise duty rates for e-liquids can complicate tax administration and provoke abuse.
Also, it is provided introduction of a zero-excise duty rate on raw tobacco and its coverage by the EU Excise Movement Control System (EMCS).
Risks of increasing levels of illicit cigarette trade
A wide range of studies have been published, which have proven a close connection between the increase of the excise duty on cigarettes and the development of their illicit market. Our analysis also showed that in 2021-2024, some of the highest levels of illicit trade in tobacco products in the EU or their significant growth were observed in countries with the highest excise duties on cigarettes. In addition, a sharp increase of the excise duty negatively affected the tobacco market and caused significant losses of budget revenues even in countries with high purchasing power of the population and institutional capacity of control bodies and law enforcement systems.
Additional risks will arise from the implementation of the Proposal provisions on cigarettes excise taxation. Considering that the minimum rates corresponding to the new requirements should come into force from 2028, a sharp increase of the excise duty on cigarettes by 35-60 euros should occur in Lithuania, which is problematic in terms of illicit trade of such products, as well as in more prosperous in this context countries such as Sweden, Slovenia, Romania, Malta, Slovakia, Austria, Poland, Spain, Portugal. A number of other EU countries – Greece, Hungary, Cyprus, Croatia and Luxembourg – will be forced to make even more radical changes to rates, and Bulgaria will have to almost double its excise duty on cigarettes.
The high pace of the minimum excise increase on cigarettes in many EU countries will create a threat of surges in counterfeit production and smuggling of such products for these member states. But such rates increase will not improve the situation for countries that already have high excise duties and suffer from the prevalence of illicit cigarettes.
For the EU accession candidates, most of which have a lower purchasing power than Romania or Croatia, the risks of the spread of illicit cigarette trade will be even greater.
Preventing such an undesirable situation is possible under the following conditions:
1. Postponement of coming into force introduction of the new minimum excise duty on cigarettes of “215 euros” to 2032.
2. Provide additional transitional periods for countries with low purchasing power.
3. Increase flexibility in the formula for calculating the minimum excise duty on tobacco and nicotine-containing products for better consideration of countries specifics (for example, in the least developed countries, not 1/3, but 1/2 of the rate may be adjusted on PLI).
It is possible to choose not one, but several of the proposed solutions.
Results of modelling the consequences of implementing the European Commission’s initiative on cigarette taxation in Ukraine
Taking into account the adjustment on PLI, the minimum excise duty on cigarettes in Ukraine may need another increase to approximately 180 euros per thousand units in the future. Namely, according to the Proposal’s provisions, Ukraine will be forced to set the minimum excise duty on cigarettes at a level close to the current average European one.
Based on our projections, if the scenario of increasing the minimum excise duty on cigarettes to 180 euros per thousand units by 2028 is implemented, Ukraine can expect a significant increase of the illicit cigarette market, reaching about 31.5% in 2028. Budget revenue losses from excise tax, VAT, and retail excise could reach about 40 billion hryvnias in 2026, 67 billion hryvnias in 2027, and 100 billion hryvnias in 2028; in total, the budget may be undercounted by more than 200 billion hryvnias. Such a sharp increase in excise duty could also accelerate the shift from cigarettes to illicit liquids for electronic cigarettes, a trend that is currently difficult to control.
Instead, the scenario of increasing the minimum excise duty on cigarettes in Ukraine to 180 euros per thousand units from January 1, 2035, when in 2028 such excise duty will reach the level of 90 euros per thousand units (as it is already stipulated by legislation), and then gradually double over seven years, will ensure a decrease in the smoking prevalence, stable growth in budget revenues, and create conditions for reducing the level of the illicit trade in tobacco products.
The soundness and consistency of the excise policy in the sphere of tobacco products in 2026-2028 will allow to reduce the share of the illicit cigarette market to 10.4% in 2028. Budget losses from such illicit cigarette market will decrease from 26.5 billion hryvnias in 2025 to 18 billion hryvnias in 2028. During this period, the combat against illicit cigarettes should be intensified, and it is important to maintain the intensity of its efforts in 2029-2035.
The approach to gradually increase of the minimum excise duty on cigarettes in Ukraine to 180 euros per thousand units from January 1, 2035 can be fixed either by amending the relevant norms of the updated Directive, supplementing the text of the Proposal, or by incorporating the specified strategy of the excise policy in new agreements on Ukraine’s accession to the EU.
An alternative scenario for increasing the minimum excise duty on cigarettes in Ukraine would exist if changes were made to future EU legislation regarding the adjustment coefficient on the price level index. For countries with PLI up to 75.0, half of the excise rate can be fixed (while in the Proposal2/3), and the other half (as in the Proposal 1/3) could be adjusted based on the purchasing power parity.
Proposals on the excise duty rates on other tobacco and nicotine-containing products in Ukraine
There is ongoing discussion around the new excise duty rules initiated by the European Commission, during which a number of serious warnings were expressed on the implementation of requirements that apply not only to cigarettes, but also to other tobacco and nicotine-containing products.
Considering the Proposal requirements regarding adjusting rates on the price level index, in 2032the excise duty on heated tobacco for Ukraine should be approximately 90.4 euros per thousand units. Thus, in 2029-2032 excise rates for HTPs should increase by 18.4 euros; it will be possible to increase this rate by 4.6 euros each year to reach the threshold of 90.4 euros per thousand units. This demonstrates Ukraine’s strong readiness to adopt upcoming EU regulations and shows that a reasonable increase in excise duty on HTPs is achievable.
In 2025, Ukraine’s excise duty rate on heated tobacco products exceeded the corresponding rate in 13 EU countries. Meeting the requirements of the Proposal regarding HTPs will cause significant challenges for several of these countries.
In Ukraine, it is important to avoid a significant price gap between completely legal HTPs and more than 90% illicit liquids for electronic cigarettes. The lower excise duty on HTPs compared to cigarettes prevents heated tobacco consumers from choosing cheaper e-liquids. This is due to the threat of additional decrease of sales volume of legal tobacco and nicotine-containing products.
Ukraine is already complying with the proposed requirements regarding the new minimum excise duty rates in the EU on liquids for e-cigarettes. It will be more difficult to comply with the new taxation rules on nicotine pouches, cigars and cigarillos. At the same time, it is likely that a number of the Proposal provisions will be softened, and our state will demonstrate greater readiness on its fulfilment.
The best strategy for Ukraine today will be to adhere the current schedule of increasing excise duty rates on tobacco and nicotine-containing products for 2025-2028, and further changes in the excise policy should be initiated after the adoption of the final version of the updated EU Directive in mentioned area.