Pharmaceutical companies can breathe a sigh of relief following the European Court of Justice’s recent ruling in the Novo Nordisk A/S case (C-248/23 ). This decision marks the third time the ECJ has softened the rules around deducting pharmaceutical subsidies from the VAT base.
Previously, in the German and Hungarian Boehringer cases (C-462/16 and C-717/19), the ECJ allowed subsidies to be deducted if paid to private insurers and later extended this to public insurers under contractual agreements.
In this latest case, the ECJ examined whether payments made by pharmaceutical companies to the Hungarian social security system were considered a tax or a rebate from a VAT perspective. The Court confirmed these payments are rebates.
This case differed from earlier cases because the contributions were mandated by law rather than contractual agreements. Pharmaceutical companies were required to pay a 10% or 20% contribution on all medicinal product sales to the Hungarian tax authority, which then transferred the funds to the Hungarian public insurer (NEAK). Although the law referred to these payments as “mandatory,” it did not classify them as taxes. The legislative history suggested the intention was to introduce a mandatory rebate, not a tax.
The ECJ agreed, allowing these mandatory rebates to reduce the VAT tax base. The ECJ reasoned that, since pharmaceutical companies do not receive full payment for their products and the public insurer uses these contributions to lower medicine prices for consumers, the payments qualify as rebates. Under VAT rules, rebates can be deducted from the VAT base, but taxes cannot.
This ruling benefits all pharmaceutical companies operating in Hungary, enabling them to claim VAT refunds from the Hungarian State, and potentially carries implications for markets in the EU with a similar tax and rebate system to that of Hungary.
For further information please contact Helga Biro, Timea Bodrogi or Zsofia Fekete from our Budapest office.
