The Portuguese government has been ordered to scrap its reduced 5% rate of VAT on wine sales, with the European Court of Justice ruling that it contravened the EU's Sixth VAT Directive, which attempts to harmonise the application of sales taxes.

Judges backed the European Commission, which had brought the case. Brussels wants Lisbon to bring its VAT rate for wine in line with the 17% rate for most other goods and services.

They dismissed Lisbon's defence that it was trying to raise the rate gradually, raising it at first to 12%, "with a view to raising the tax progressively to the normal rate."

Instead, stating that "the Portuguese Republic has failed to fulfil its obligations," and ordering it to pay costs, the ECJ told it to comply with EU law.

If it refuses, possibly because of references made by Lisbon to "internal political questions to be resolved, particularly in the wine sector," the court could levy massive daily-recurring fines of Euro100,000, payable until it complies with the ruling.