Europe: CJEU - Public health fund contributions decrease VAT base for pharmaceutical firms

CJEU delivers its judgment in the Boehringer case

In brief

On 6 October 2021, the Court of Justice of the European Union (CJEU) delivered its judgment in the Boehringer case involving Hungary. The judgment highlights that despite continuous changes, the Hungarian VAT Act still regulates the VAT treatment of discounts and allowances granted by the seller in a manner contrary to Community law.


The genesis of the case is the self-revision submitted by the Hungarian branch of the pharmaceutical company Boehringer Ingelheim ("Boehringer"). Boehringer submitted a self-revision to its VAT returns and reclaimed a significant amount of VAT because, in its view, it actually received less money for the social security subsidized medicines it sold on the Hungarian market than the state health insurance fund paid for the medicines. This is due to pharmaceutical companies' obligation to pay for their sales of social security subsidized medicines. According to Boehringer, that obligation to pay effectively represents a discount since it actually reduces the purchase price received, with the result that Boehringer should not have had to pay VAT on the "discount" that it did not receive.

The state health insurance fund provides subsidies for the price of medicines ordered with social security benefits within the framework of outpatient care, which means that the patient pays only a "reimbursement fee" to the pharmacy and the state health insurance fund reimburses the amount of the subsidy to the pharmacy. In line with general market practice, Boehringer has concluded a volume agreement with the state health insurance fund, on the basis of which it had to make payments to the state health insurance fund in the amount specified in the contract from its revenue received for the sale of medicinal products after the medicines are sold on a quantitative basis. 

The quantitative basis of the volume agreement means that a pharmaceutical company's payment liability arises when the subsidy paid by the state health insurance fund exceeds a threshold to which is added a box-rate subsidy. The latter is a payment obligation established in proportion to the subsidy paid for each quantity unit sold with a subsidy.

The state health insurance fund reimburses these payments of pharmaceutical companies to the pharmacies. As a result of the above subsidy system, pharmaceutical companies do not receive a part of the consideration after the medicines are sold. 

The basic principle of the VAT system is that VAT must always be paid on the actual purchase price. If a company gives a discount on the price of a product or service, the amount of VAT is also reduced.

The CJEU ruled that the Hungarian VAT Act is contrary to community law because it does not allow Boehringer's tax base to be reduced with the payments fulfilled to the state health insurance fund. Based on a non-compulsory contract, pharmaceutical companies may be entitled to a subsequent reduction of their tax base after certain payments are made from the turnover of medicinal products, even though these payments were not determined in advance in the business policy of the company and were not made for promotional purposes.

Significance of the case at EU level

This is not the first such case Boehringer has won. On 20 December 2017, the CJEU delivered its judgment in case C-462/16 between Finanzamt Bingen-Alzey and Boehringer Ingelheim Pharma GmbH & Co. KG, in which the CJEU ruled that a discount to private health insurers (not only public insurances) also leads to a reduction in remuneration for the supply of medicines to the wholesalers or pharmacies — even though the private health insurer (as beneficiaries of the discounts) had not been the purchaser of the goods (under German law, the insured persons themselves would have been the purchasers). Judging from this case, the reduction of the tax base for VAT appears to be broadly accepted in Germany for different types of rebate configurations. However, German law would not have made an attempt to restrict pharma rebates generally from reductions of the VAT base. For public health insurance funds, which are treated as being directly in the VAT supply chain as recipients of the goods, VAT reduction following rebates had already been recognized by the German tax authorities before the 2017 case.

In those Member States where the pharma financing system is similar to Hungary's or Germany's system, the Hungarian and the German Boehringer cases might result in the same VAT reclaim opportunities.

Impact on Hungary

Direct refund 

In view of the judgment, pharmaceutical companies might be entitled to a VAT refund under Section 197 of the Act on the Rules of Taxation up to the amount of VAT charged on payments made to the state health insurance fund for social security subsidized medicines. Self-revisions may be submitted for tax returns that have not yet expired within 180 days of the publication of the above judgment. In addition to the VAT refund, the tax authority is obliged to pay interest on the refundable tax at a rate equal to two percentage points of the central bank base rate from the due date of the payment obligation specified in the self-revised returns or, if it is later, from the date of payment of the tax until the submission of the self-revision.

Anomaly of Hungarian regulation

This seemingly simple problem — VAT to be paid on the purchase price actually received — has not been adequately handled by the Hungarian VAT Act for decades, as shown by the series of CJEU cases concerning Hungary. Without wishing to be exhaustive, the Almos Agrarian Foreign Trade Judgments of 15 May 2014, the Lombard Leasing Judgments of 12 October 2017 and the Porr Order of 24 October 2019, which also made waves, declared that the rules of the VAT Act on discounts are in conflict with EU law.

In each case, the question was whether the Hungarian VAT Act only allowed for a reduction in the VAT payable if strict conditions were met, if the Hungarian VAT rules were complied with, and if the seller gave a discount on the price of the product or service or otherwise actually received less money from the buyer, for example, because the buyer went bankrupt. This is because there may be a case where, although the buyer receives a discount afterwards and pays less, the strict rules of the VAT Act still prevent the seller from having to pay less VAT.

The Boehringer judgment may introduce a new system for dealing with discounts

The CJEU had to deal with the Boehringer case because the obligation to pay into the state health insurance fund could not be classified in any of the discount categories listed in the VAT Act and, thus, Boehringer was not able to reduce the VAT base payable by the discount. However, the payment obligation is a discount because it reduces the purchase price actually obtained. 

The CJEU has made it clear that no conditions can be attached to the refund of VAT in the case of subsequent discounts. The Hungarian VAT Act cannot stipulate that only certain discounts belonging to specified categories reduce the amount of VAT payable. In each case, only the amount the seller actually received can be taken into consideration.

In light of the above statement of the CJEU, the part of the VAT Act concerning discounts should be completely rewritten. This has been necessary for a long time. The need for amendment is clearly illustrated by the fact that the VAT Act regulates in long paragraphs — essentially through several pages — Article 90 of the directive on which the VAT law is based, which could be worded in a single sentence: "In the case of cancellation, refusal or total or partial nonpayment, or where the price is reduced after the supply takes place, the taxable amount shall be reduced accordingly under conditions which shall be determined by the Member States."

Impact on Poland


Similar to other European countries, the Polish drug reimbursement system contains regulations under which entities distributing drugs pay to the public health insurer (National Health Fund, in Polish "Narodowy Fundusz Zdrowia") previously agreed amounts to participate in drug refund costs. These amounts are referred to in Poland as the "risk-sharing instrument" (in Polish: "instrument dzielenia ryzyka").

In simplified terms, the mechanism works as follows: Retail sale of drugs in Poland takes place through pharmacies that are supplied by wholesale distributors. Drugs purchased by patients in pharmacies may be partially or fully financed by the National Health Fund, which applies a system of price subsidies (which means that it does not purchase drugs, but only participates in financing their purchase directly by patients). In order to cover a drug under the reimbursement system, an administrative procedure must first be carried out with the participation of the drug distributor, as a result of which this drug distributor receives an administrative decision. Such a decision specifies the price to be paid by a patient (i.e., pharmacy customer) for a given drug, and the annexes to the decision also specify the above-mentioned "risk-sharing instrument" — a mechanism which, in a very simplified manner, involves the drug distributor returning to the National Health Fund part of the refund amount. These returns are calculated on the basis of detailed algorithms described in the decision.

Polish practice of classifying risk sharing instruments under the VAT Act

The provisions of the Polish VAT Act do not directly address the issue of settling the payments described above (risk-sharing instruments) by entities distributing medical devices to the National Health Fund.

In this respect, the general provisions of the Polish VAT law are applicable, according to which the tax base is "everything that is the payment that the supplier of goods or the service provider has received or is to receive for the sale." The tax base may then be reduced by discounts granted. The general principles derived from the case law of the CJEU are also applicable. According to these rules, the tax base must not exceed the amount actually received by the seller and must strictly correspond to the amount received by him (p. 28 and 29 of C-317/94 Elida Gibbs judgment).

The Polish tax authorities generally accept the above rules and, consequently, allow the tax base to be reduced not only by direct rebates but also, for example, by so-called indirect rebates (e.g., a food producer pays a bonus for the agreed resale value directly to a retailer, bypassing a wholesaler who previously purchased goods from that producer). With respect to payments made by drug distributors to the National Health Fund (risk-sharing instruments), however, the authorities do not allow the tax base to be reduced in a private tax ruling issued for adjustments of VAT turnover (and output VAT).

The tax authorities' explanations in this regard are unconvincing and come down to indicating that since the risk-sharing instrument is not a statutory obligation in Poland (as indicated above, it results from an administrative decision) and because the National Health Fund does not participate in the supply chain, the amounts paid are not a rebate within the meaning of VAT law. The tax authorities also indicate that any similarity between the Polish drug reimbursement system and the aforementioned 2017 case, (C-462/16 Boehringer Ingelheim) is only superficial.

However, the tax authorities' position above has recently been challenged in four judgments of the Provincial Administrative Court in Warsaw. The court, expressly referring to the CJEU judgment in the case of Elida Gibbs (C-317/94) and C-462/16 Boehringer Ingelheim Pharma GmbH & Co. KG, indicated that drug distributors have the right to correct the turnover (and output VAT) paid in connection with the distribution of drugs to pharmaceutical wholesalers. 

The district administrative court pointed out that although the judgment in case C-462/16 provides no explicit information that relates to the risk-sharing instrument used in Germany in connection with the reimbursement of drugs, the facts given in the factual and legal status of that judgment indicate that it concerned a situation similar to the Polish risk-sharing instrument, which consists of a pharmaceutical company making payments to public health insurance funds. Therefore, when interpreting the provisions of the Polish VAT Act, taking into account the above ruling of the CJEU, it should be stated that the taxpayer reduces the turnover not only by the amounts of rebates granted to its direct contractors but also by the amount of the risk-sharing instrument paid to the National Health Fund. In such a case, the basis for reducing the turnover is an accounting note (not a VAT invoice).

These judgments are currently not final and are subject to cassation proceedings before the Supreme Administrative Court.

The impact of the latest Hungarian judgment C 717/19 on Polish practice

The judgment in case C-717/19 is another judgment of the court concerning various rebate configurations and similar mechanisms. The judgment of the CJEU confirms that with this type of "returns" of received remuneration, it is possible to reduce the taxable base. It should be assumed that the judgment in case C-717/19 will have a positive impact on Polish practice and, consequently, that the expected rulings of the Supreme Administrative Court will be favorable for Polish taxpayers.

Impact on Spain

The Spanish General Tax Directorate (SGTD) has issued a recent ruling (V1598-21) regarding a very similar case to Boehringer. In the case at hand, the medicine distributor sells medicine to pharmacies subject to subsidy from the Spanish National Health Services (NHS). When individuals buy such medicines, the NHS covers a part of the cost.

Royal Decree 1/2015 foresees an obligation on a medicine distributor to pay, on a four-monthly basis, the amounts resulting from applying a certain percentage to its volume of sales through the said prescription. This means that medicine distributors are obliged to refund to the NHS a percentage of the sales covered by the NHS if certain thresholds are exceeded.

The SGTD concluded that the payment performed by medicine distributors to NHS qualifies as discounts or rebates. The taxable base of such discount shall be determined by the consideration received for its sales of medicines to pharmacies. The output VAT on medicine sales can be reduced, according to the discount granted, excluding VAT charged by the pharmacies to individuals. In addition, medicine distributors must issue and keep an amending invoice, which shall not be issued to pharmacies.

As a result of the economic improvements granted to the National Health Service (discounts), the medicine distributor must amend the taxable base in accordance with the provisions of Article 80 of the Spanish VAT Law 37/1992 under the conditions described, and the pharmacy would not have to rectify the tax originally charged by the medicine distributor or the deductions performed.

Impact on the UK

In the UK, while CJEU decisions are no longer binding, they remain persuasive. HM Revenue & Customs (HMRC) and the UK Courts should apply the Boehringer decision in determining when a payment is to be treated as a discount to the prices of goods or services. However, HMRC is yet to update its guidance to reflect the most recent Boehringer decision, and it remains to be seen how widely they will accept it. Historically, we would have expected HMRC to be more likely to treat a non-contractual payment to a third party that is not in the supply chain as payment for a separate supply, for example, promotional activities, than as a price reduction by the payer in line with its guidance in Notice 700/7. However, the Boehringer decision means either HMRC will have to closely review that position or further litigation is likely on this point.

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