ECJ backs VAT deduction on Hungarian pharmaceutical tax

On 12 September 2024, the Court of Justice of the European Union ruled in the Hungarian case C-248/23 Novo Nordisk S/A, which confirms potentially significant savings for pharmaceutical companies in Hungary.

The European Court of Justice (ECJ) has issued a preliminary ruling regarding the reduction of the taxable amount for VAT in Case No. C-248/23, involving Novo Nordisk, a Danish pharmaceutical company. The ruling addresses Novo Nordisk’s attempt to reduce its VAT liability through a corrected return based on payments made under price volume agreements with Hungary’s public health insurance agency.

Background

In Hungary, distributors of medicinal products, are subject to an ex lege obligation to make payments corresponding to 20% and 10%, respectively, of a portion of the social security subsidies relating to all medicinal products that are sold in pharmacies in Hungary and benefit from public funding and that were sold by it (‘the ex lege obligation’).

In a nutshell, NEAK (National Health Insurance Fund of Hungary) decides on public financing on medicines: (i) firstly whether a medicine should be included in the list of subsidized medicines after a study that takes into account various aspects, and (ii) then determines the eligible amount as subsidy. The final price of medicines, which also constitutes the tax base (taxable amount) for VAT purposes, consists of two components: the subsidy from NEAK and the actual price paid by the patient as ‘personal contribution’. The pharmacy therefore pays VAT on both the amount paid by the patient and NEAK.

Novo Nordisk submitted a corrected VAT return (for 2016), seeking to lower its taxable amount by including the ex lege obligation payments made under subsidized price volume agreements with Hungary’s public health insurance agency. The Hungarian tax authority rejected Novo Nordisk’s claim to reduce its taxable amount.

In its previous case C-717/19 Boehringer also revolving around payment made to NEAK in Hungary, the ECJ already concluded that the VAT base could be reduced by the amount of payments made to NEAK under the volume of subsidy contracts.

Question to be considered

In the current case, the Hungarian court referred the question to the ECJ for preliminary ruling: whether it is compatible with EU regulation that the company is not entitled for deduction of tax base for the ex lege obligation towards NEAK, while payments made under a price volume agreement and investments made by the company in research and development in the health sector may be deducted from the base amount for the payment obligation, and where the amount payable is collected by the state tax authority, which immediately transfers it to the state health insurance agency?

Decision by the Court

The Court (i) first established that – as confirmed by the tax authority and the Hungarian government – the ex lege obligation should be regarded as a tax and (ii) also presumed that it does not constitute any added value.

The ECJ reiterated the findings and principles laid down in the previous Boehringer case. The Court found that it is contrary to the fundamental principles of the EU VAT regime for a taxable person to be liable to pay more VAT to the state budget than he ultimately receives. In fact, by making payments of pharmaceutical tax to the NEAK, Novo Nordisk had effectively foregone part of its revenue from the sale of medicines. Consequently, Novo Nordisk was obliged to pay more VAT than it actually incurred.

The ECJ has also confirmed that the pharmaceutical tax should be considered for VAT purposes as a subsequent price reduction which should allow for reduction of the taxable amount. This qualification is not affected by the fact that the operators concerned are legally obliged to pay the pharmaceutical tax (ex lege obligation), nor by the fact that the pharmaceutical tax is paid to the tax authorities since the latter automatically transfers the amount to NEAK.

Conclusion

Based on the decision of the ECJ, it is for the Hungarian legislator to align the Hungarian rules with the EU Directive and its principles accordingly, however, Hungarian pharmaceutical distributors should be entitled to reduction of their tax base even before the formal adjustment is made in Hungarian VAT Act, based on the ECJ judgement itself.