Legal News

Free Trade Agreement between the EU and the Mercosur

The free trade agreement between the EU and the Mercosur is one of the most complex and geopolitically sensitive files in the European Commission's portfolio. Although a political agreement was reached in 2019 and the relevant treaties were formally signed on January 17, 2026, the European Parliament suspended the ratification process and referred the matter to the Court of Justice of the EU. As a result, the ratification of the agreement may be delayed by approximately 18 to 24 months. Nevertheless, we will take a brief look at what the agreement in question brings.

The agreement aims to create one of the largest free trade areas in the world, covering more than 780 million people. For the EU, this is a strategic step towards diversifying supply chains and securing access to raw materials in countries such as Argentina, Brazil, Paraguay, and Uruguay. Bolivia became a full member of Mercosur in 2024, subject to specific transition periods under the agreement.

For political reasons, the structure was divided into two separate treaties:

(i) EU-Mercosur Partnership Agreement (EMPA) – requires ratification by all EU Member States;
(ii) Interim Trade Agreement (iTA) – focused on trade aspects falling within the exclusive competence of the EU.

Key provisions

1. Import liberalization
The agreement proposes the elimination of customs duties on 91% of goods exported from the EU to Mercosur:

(i) Significant reduction in tariffs on machinery, chemicals, and medicines. For automobiles (current tariff 35%), the reduction will take place gradually over 10 to 15 years, not immediately;
(ii) The EU will eliminate tariffs on 82% of agricultural imports, but has introduced tariff rate quotas (TRQs) on sensitive products such as beef, poultry, and sugar.

2. Geographical indications (GI)
The parties agreed to protect around 350 European geographical indications (e.g. Champagne, Tokaj). This legal framework will prevent the misuse of protective names within the Mercosur bloc and strengthen the enforceability of intellectual property rights.

3. Public procurement and services
For the first time on this scale, the agreement opens up Mercosur countries' public procurement markets, allowing EU companies to compete for contracts on the same basis as domestic firms.

Risks and regulatory challenges
Business entities must take into account the EU Deforestation Regulation (EUDR). Based on the approved postponement, the key implementation dates are as follows:

(i) December 30, 2025 for large entities;
(ii) June 30, 2026 for micro and small enterprises.

Entities trading in soybeans, beef, or timber must implement strict due diligence on the origin of goods.

Dispute resolution
The agreement includes a standard mechanism for resolving disputes between states. Unlike modern agreements (e.g., with Canada), however, it does not currently include a specialized investment court system (ICS).

Priorities for business practice
(i) Audit of supply chains for compliance with EUDR deadlines;
(ii) Analysis of rules of origin with regard to the gradual tariff reduction schedule for industrial components;
(iii) Legal protection of assets through trademark registration and use of new provisions on geographical indications.

***

Series: Current case law of the Court of Justice of the European Union

#1 The Duality of Financial Sanctions: Cumulative Imposition of Interest and Penalties under the UCC (Case C-506/23)

In its judgment in Case C-506/23 (Network One Distribution SRL), the Court of Justice of the European Union (CJEU) addressed a pivotal question concerning the financial consequences of late payments of customs debts. The core of the dispute lay in whether Article 114 of Regulation (EU) No 952/2013 (the Union Customs Code – UCC), which provides for "interest on arrears," precludes Member States from imposing additional "late-payment penalties" under national law for the same underlying customs debt.

The case originated from a Romanian referral following a post-clearance audit where an importer was charged anti-dumping duties on bicycles originating from China (falsely declared as originating from Thailand). In addition to the anti-dumping duties, the authorities levied both interest on arrears (per Art. 114 UCC) and a late-payment penalty (per the Romanian Tax Procedure Code). This judgment clarifies the distinction between compensatory measures and punitive sanctions within the EU Customs Union.

Claims of the Parties and Legal Arguments

Network One Distribution SRL (the Plaintiff) argued that the imposition of both interest and penalties was unlawful. According to the plaintiff, Article 114 of the UCC constitutes an exhaustive regulation of all financial consequences arising from a delay in payment. They contended that Art. 114 effectively unified interest and penalties into a single rate, and therefore, the cumulative application of an additional national penalty resulted in an unjustified and disproportionate financial burden for the same breach of obligation.

The Romanian Government and the European Commission maintained that interest on arrears and late-payment penalties serve distinct legal purposes.

Interest on arrears (Art. 114 UCC) is compensatory in nature; it aims to offset the advantage gained by the debtor from keeping the funds past the maturity date and to compensate the Union/State budget for the loss of use of those funds.

Late-payment penalties (National Law) are punitive and deterrent in nature; they are intended to sanction the failure to comply with customs regulations within the prescribed timeframes.

The Commission further pointed to Article 42 of the UCC, which explicitly mandates Member States to provide for "effective, proportionate, and dissuasive" sanctions for failure to comply with customs legislation.

The Court’s Ruling and Legal Reasoning

The CJEU ruled that Article 114 of the UCC does not preclude national administrative practices that impose late-payment penalties in addition to the interest on arrears prescribed by the UCC.

The Court concluded that default interest compensates for the undue advantage obtained by the debtor, whereas the national penalty is an independent administrative sanction.

This judgment is significant because it reinforces the fiscal autonomy of Member States in enforcing customs debts. It confirms that the UCC does not seek to "occupy the field" regarding the punitive aspects of customs enforcement, leaving room for national "surcharge-type" sanctions.

Impact on Slovak Law

This judgment has a direct impact on the interpretation of the relationship between the UCC and Slovak Law No. 199/2004 Coll. (Customs Law).

In the Slovak legal system, the distinction between default interest and penalties (fines) is firmly established. Penalties as known in the Romanian legal system are not applied in Slovakia.

The judgment provided the Slovak financial authorities with strong legal support for maintaining the current concurrence of interest under Article 114 of the Customs Code and penalties under national law (see in particular Section 72(1)(d) of the Customs Act).

Therefore, in administrative or judicial proceedings, arguments cannot be based solely on the "concurrence" of reparations and penalties, which is permissible.

Instead, legal arguments could focus on whether the combined financial burden violates the principle of proportionality under Article 42 of the UCC, which remains one of the few viable controls on a Member State's power to impose sanctions.

***

The EU Carbon Border Adjustment Mechanism (CBAM) - State of Play

(February 2026)

The CBAM is a cornerstone of the European Union’s “Fit for 55” package, aimed at reducing net greenhouse gas emissions by at least 55% by 2030. Its primary legal objective is to prevent “carbon leakage”—the risk that EU-based companies move carbon-intensive production abroad to countries with less stringent climate policies.

Timeline and Implementation Status

The CBAM implementation follows a two-stage process under Regulation (EU) 2023/956:

• The Transitional Phase (Oct 1, 2023 – Dec 31, 2025): This phase served as a learning period. Importers were required to report the embedded emissions of their goods without making financial payments.
• The Definitive Period (Started Jan 1, 2026): We are now in the definitive phase. As of January 2026, the reporting-only obligation has transitioned into a financial obligation. Importers must now purchase and surrender CBAM certificates to cover the carbon emissions embedded in their imported goods.
  
  

Affected Commodities

The CBAM currently targets the most carbon-intensive sectors where the risk of leakage is highest: iron and steel, aluminum, cement, fertilizers, electricity, hydrogen (added during legislative negotiations). There are ongoing discussions within the European Commission to expand this scope to include downstream products (e.g., screws, bolts, and certain automotive parts) and potentially chemicals and polymers by 2030.

How the Definitive Phase Works (2026 onwards)

As of January 2026, the following legal requirements apply:

• Authorized CBAM Declarant Status: Only "authorized CBAM declarants" are permitted to import covered goods into the EU. Businesses must apply for this status through the CBAM Registry.
• CBAM Certificates: The price of certificates is calculated based on the weekly average auction price of EU ETS (Emissions Trading System) allowances.
• Surrender Obligation: By May 31 of each year (starting in 2027 for the 2026 calendar year), declarants must surrender the number of certificates corresponding to the emissions embedded in their imports from the previous year.
• The Phase-in / Phase-out Link: The CBAM financial burden will progressively increase as the Free Allowances under the EU ETS are gradually phased out (from 2026 to 2034).
  
  

Key Challenges for Businesses

a) Data Integrity and Verification

The most significant challenge for US and non-EU exporters is the primary data requirement. The EU now demands actual emission data from the installation (factory) level. If actual data is not provided, "default values" (representing the worst-performing 10% of EU installations) will be applied, significantly increasing the cost for the importer.

b) Supply Chain Transparency

Importers must conduct rigorous due diligence to obtain accurate data from their global suppliers. This requires drafting new compliance clauses in procurement contracts to ensure suppliers provide verified emission reports.

Geopolitical and Legal Expectations

• WTO Compatibility: The EU maintains that CBAM is a climate measure, not a trade barrier, and is thus compatible with World Trade Organization (WTO) rules. However, trade partners (notably China, India, and even the US) continue to monitor this for potential "disguised protectionism."
• Carbon Price Offsetting: If an exporter can prove that a carbon price has already been paid in the country of origin (e.g., a local carbon tax), that amount can be fully deducted from the EU CBAM obligation.
• US Response: While the US does not have a federal carbon price, there is increasing bipartisan interest in a "PROVE It Act" style legislation, which could lead to a US-specific carbon border adjustment to remain competitive with the EU.

Legal Summary for the Declarant

The transition from "reporting" to "paying" in January 2026 represents a major shift in operational expenditure. It is necessary to:

• Verify that the entity is registered as an Authorized CBAM Declarant.
• Audit verification reports from non-EU installations for the 2026 reporting cycle.
• Budget for the purchase of CBAM certificates based on projected import volumes and current EU ETS pricing.
• Implement compliance clauses in purchase agreements to ensure suppliers provide verified emission reports.