CJEU ruling allows for VAT paid on subsidised pharma products to be partially reclaimed

The Court of Justice of the European Union (CJEU) published a landmark ruling in a preliminary ruling procedure that will significantly benefit the Hungarian pharmaceutical industry.

As a result of the decision, the sector’s VAT burden could be significantly reduced. In addition, distributors and market authorisation holders can request partial refunds on VAT payments on the sales of medicinal products and dietary supplements over the last five years if they were subject to a specific repayment obligation to Hungary’s National Health Insurance Fund (NEAK). These requests can be made within a 180-day window.

In Hungary, marketing authorisation holders and distributors who distribute subsidised medicinal products or dietary supplements that are sold in pharmacies are obliged to make payments to the NEAK as provided in the Medicines Thrift Act. These payments correspond to a certain percentage (i.e. 10% or 20% under the general rules, and 20% and 40% under the currently applicable temporary extra profit tax rules) of the social security subsidy granted by NEAK.

The question examined by the CJEU was whether, under the Medicines Thrift Act, such payments made by pharmaceutical companies to NEAK should be regarded as taxes or as a discount decreasing the “consideration” that the seller is deemed to receive. If the relevant sum qualifies as a discount that sum cannot be considered as effectively being received by the pharmaceutical company in the sale of its product, which would result in the VAT taxable base being reduced.

Following the logic of its previous decision on a similar Hungarian case (C-717/19), which concerned payments made by pharmaceutical companies based on price volume agreements, the CJEU has now confirmed that the 10%/20% mandatory repayments into the state budget also qualify as discounts under the EU VAT system. This is because the purpose the payments are designed to provide support to the purchase price of the products prescribed with social security support and also because – due to these payments to NEAK – the pharmaceutical companies do not receive the entire amount of the consideration from the sale of the products. Consequently, the Hungarian state will need to allow the VAT taxable base of the medicinal products sold to be reduced by these amounts.

The ruling opens the door to all taxpayers that were required to pay this 10%/20% (or 40% under the current temporary rules) mandatory payment to NEAK (i.e. essentially the marketing authorisation holders, and in certain cases the Hungarian distributors) to claim a VAT refund from the Hungarian Tax Authority for the past five years within a 180-day period following the ruling with respect to VAT paid in Hungary on the sale of medicinal products and dietary supplements

The article was co-authored by Diána Galambosi and Dalma Sipőcz.

For more information on this ruling and assistance in processing a refund request, contact your CMS client partner or these CMS Budapest tax experts.