Indirect Tax News - January 2022

CJEU rules Hungary must allow pharmaceutical company to deduct VAT on sales

The Court of Justice of the European Union (CJEU) issued an important decision on 6 October 2021 in the Boehringer Ingelheim case, which involved a dispute between the taxpayer (a Hungarian subsidiary of a German pharmaceutical company) and the Hungarian tax authorities as to whether the taxpayer was allowed to deduct VAT paid under a voluntary arrangement with the Hungarian state health insurance agency (NEAK) from its tax base. The CJEU concluded that Hungarian law implementing the EU VAT directive was not in line with EU rules and, therefore, the taxpayer could deduct from its VAT liability the payments made to the NEAK. The court specifically confirmed that VAT is levied only on consideration actually received.


The taxpayer markets and distributes pharmaceuticals to wholesalers that sell the prescription drugs to Hungarian pharmacies, which then dispense the medicine to patients. Some of the drugs are subsidized by the NEAK; NEAK grants a subsidy for the purchase price of prescription drugs that are reimbursed by social security in the context of outpatient treatment. Payment of the cost of the subsidized drugs is divided between the NEAK and the patient. The patient makes a co-payment to the pharmacy, which corresponds to the difference between the drug price and the amount of the subsidy. The NEAK subsequently reimburses the subsidy amount to the pharmacy. The price for drugs obtained by pharmacies—which constitutes the taxable amount for VAT purposes—thus has two components: the subsidy from NEAK and the patient’s co-payment so the pharmacy pays VAT on both amounts.

To ensure that the drugs distributed by the taxpayer on the Hungarian market continue to benefit from a subsidy, the taxpayer concluded an agreement—called a “support volume contract”—with NEAK, under which the taxpayer paid a specified amount to NEAK based on turnover from the sales of the drugs in Hungary. The contribution was set as a percentage of the gross amount of the subsidy provided by NEAK.

The taxpayer wanted to reclaim the VAT it had accounted for on its sales of drugs to pharmacies, so it filed a corrective VAT return, taking the position that the amounts it paid to NEAK constituted a post-sale price reduction. The Hungarian tax authorities rejected the claim on the grounds that the payments made to NEAK did not fulfill the conditions under domestic law for a reduction in the consideration and this was upheld on appeal. The taxpayer appealed and the case was referred to the CJEU.

CJEU decision

The case before the CJEU involves a practice—instituted mainly for budgetary and financing reasons—under which the Hungarian government contractually agrees to the financing of a designated amount of the sales of a pharmaceutical company’s products and the company pays a specific contribution. However, while the pharmaceutical manufacturer had to pay VAT with respect to its drug supplies to wholesalers, it was unable to reduce it VAT base by the amount paid to NEAK, with the effect that the taxpayer has a higher VAT liability.

The court reconfirmed the principle in the EU VAT directive that a taxable person must account for VAT only on amounts actually received for its supplies.

This practice is used in other EU countries. For example (and as referred to in the 2021 CJEU decision), Boehringer prevailed in a similar case in Germany in 2017. In that case, the CJEU held that discounts granted to German private health insurance funds by Boehringer resulted in a reduction of Boehringer’s VAT base. Boehringer supplied pharmaceutical products to pharmacies through wholesalers, and the pharmacies dispensed the drugs to patients covered by private insurance; the insurer reimbursed the patients for the purchase price of the drugs. The CJEU held that Germany had to allow the discount as a reduction of the taxable consideration received by the taxpayer.

These two CJEU decisions are likely to have a significant impact in the EU. As a result of the 2021 decision, Boehringer is entitled to a refund of VAT paid. The decision also opens up the possibility that pharmaceutical companies that concluded similar support volume contracts (in both Hungary and other EU member states) may be able to reduce their VAT base and request refunds of VAT provided the statute of limitations period has not expired.

Dr. Brigitta Szabó

István Rácz