Briefing Document: ECJ Judgment in Case C-248/23 (Novo Nordisk)

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On September 12, 2024, the ECJ released the Judgment in the case C-248/23 (Novo Nordisk).

This briefing document analyses the judgment of the European Court of Justice (ECJ) in Case C-248/23 (Novo Nordisk) concerning the VAT treatment of legally mandated payments by pharmaceutical companies to state health insurance agencies.

Sources:

“CURIA – Documents”: Judgment of the Court (First Chamber) of 12 September 2024 in Case C‑248/23 (Novo Nordisk A/S v Nemzeti Adó- és Vámhivatal Fellebbviteli Igazgatósága).
“ECJ C-248/23 (Novo Nordisk) – Judgment – Reduction taxable amount on ex lege payments to the State health insurance agency – VATupdate”.

Executive Summary:

The ECJ has ruled in favour of Novo Nordisk, a pharmaceutical company, in a dispute with the Hungarian tax authorities. The Court found that Article 90(1) of the EU VAT Directive precludes national legislation that prevents a pharmaceutical company from reducing its VAT taxable amount for legally mandated (ex lege) payments made to a state health insurance agency (in this case, the Hungarian NEAK) based on the revenue from publicly funded pharmaceutical products. The ECJ determined that these mandatory payments constitute a price reduction after the supply has taken place, aligning with the principle of fiscal neutrality. This ruling has implications for pharmaceutical companies across the EU making similar statutory payments.

Main Themes and Important Ideas/Facts:

The Dispute: The case concerned Novo Nordisk’s attempt to reduce its VAT taxable amount in Hungary for payments it was legally obligated to make to the NEAK, calculated as a percentage of the social security subsidies for its publicly funded medicines sold in pharmacies. The Hungarian tax authorities rejected this, arguing these payments were not a price reduction for VAT purposes.
“The request has been made in proceedings between Novo Nordisk A/S and the Nemzeti Adó- és Vámhivatal Fellebbviteli Igazgatósága (Appeals Directorate of the National Tax and Customs Administration, Hungary; ‘the Appeals Directorate’), regarding the decision by which it refused to permit Novo Nordisk to deduct ex lege payments made to the Nemzeti Egészségbiztosítási Alapkezelő (National Health Insurance Fund Management Agency, Hungary; ‘the NEAK’) from the taxable amount for value added tax (VAT) purposes.” (CURIA – Documents)
Article 90(1) of the VAT Directive: This article stipulates that “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.” The ECJ’s interpretation of this article was central to the ruling.
“In the case of cancellation, refusal or total or partial non-payment, 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.” (Article 90(1) of Council Directive 2006/112/EC)
ECJ’s Reasoning: The Court reasoned that the ex lege payments effectively reduce the consideration Novo Nordisk receives for its medicinal products. Even though the payments are made to the NEAK via the tax authority, and not directly to the purchasers (patients), the NEAK is considered the final consumer in this context due to its role in subsidising the medicines and reimbursing pharmacies. Therefore, the VAT charged should not exceed the amount effectively paid by this final consumer.
“Thus, since a portion of the consideration obtained from the sale of the medicinal products by the pharmaceutical company has not been received by the latter because of the contribution it pays to the State health insurance agency, which refunds part of the price of those medicinal products to the pharmacy, it must be found that there has been a reduction in the price of the medicinal products after the supply took place within the meaning of Article 90(1) of the VAT Directive” (CURIA – Documents)
Fiscal Neutrality: The principle of fiscal neutrality, a cornerstone of the EU VAT system, was key to the ECJ’s decision. Taxable persons should only be liable for VAT on the actual economic benefit they derive from a transaction. Levying VAT on the portion of the price Novo Nordisk was legally obliged to pay away would violate this principle.
“It would not be consistent with the principle of fiscal neutrality recalled in paragraph 32 of the present judgment for the taxable amount on which the VAT, for which the pharmaceutical company is liable, as a taxable person, is calculated to be higher than the amount which it ultimately received.” (CURIA – Documents)
Rejection of Hungarian Arguments: The Hungarian tax authorities argued that the payments were not a price reduction as they were not made directly to the final consumer and were more akin to a tax aimed at budgetary and health objectives. The ECJ dismissed these arguments, stating that the ultimate beneficiary of the price reduction is the NEAK (as the subsidising body), and the fact that Member States can introduce taxes does not prevent a mandatory payment from being considered a price reduction for VAT purposes if it reduces the supplier’s received consideration.
“As recalled in paragraph 44 of the present judgment, the latter transfers those amounts immediately to the NEAK, which grants a subsidy covering the purchase price of medicinal products sold on prescription and funded by social security in the context of outpatient care. The mechanism of that immediate transfer supports the classification of the disputed payments as a price reduction within the meaning of Article 90(1) of the VAT Directive.” (CURIA – Documents)
Consistency with Previous Case Law: The ECJ referenced previous judgments, such as Boehringer Ingelheim (C-717/19 and C-462/16), which established that price reductions granted by pharmaceutical companies, even to health insurance companies, can lead to a reduction in the taxable amount for VAT. The ex lege nature of the obligation in the Novo Nordisk case did not fundamentally alter this principle.
“Furthermore, the parties to the proceedings confirmed at the hearing that the purpose of the payments made under the ex lege obligation is identical to that of those made on the basis of the price volume agreements concluded between the social security agency and the pharmaceutical companies, namely to subsidise the purchase price of medicinal products sold on prescription and funded by the social security system in the context of outpatient care.” (CURIA – Documents)
Treatment of Other Deductions: The referring court noted that Hungarian law allowed VAT deductions for payments under price volume agreements and for research and development (R&D) expenses, while denying it for the ex lege payments. The ECJ’s ruling ensures a more consistent treatment of reductions in the effective consideration received by the pharmaceutical company, reinforcing fiscal neutrality.
Implications for EU Pharmaceutical Companies: The ruling suggests that pharmaceutical companies across the EU making similar mandatory payments to state health insurance agencies on publicly funded medicines should generally be entitled to a VAT reduction on these payments. National laws unduly restricting this may be incompatible with EU law.
“This ruling clarifies that mandatory payments made by pharmaceutical companies to state health insurance agencies, which effectively reduce the revenue received from the sale of publicly funded medicines, should generally be treated as price reductions for VAT purposes across the European Union.” (ECJ Ruling: Novo Nordisk VAT and Statutory Payments)

Conclusion:

The ECJ’s judgment in the Novo Nordisk case confirms the broad application of Article 90(1) of the VAT Directive and the fundamental principle of fiscal neutrality. Legally mandated payments by pharmaceutical companies to state health insurance agencies, which effectively reduce the consideration received for publicly funded medicines, should be treated as price reductions for VAT purposes, allowing for a corresponding reduction in the taxable amount. This ruling has significant implications for the VAT treatment of pharmaceutical sales in EU Member States with similar regulatory frameworks.

Frequently Asked Questions: ECJ Ruling on Novo Nordisk VAT Case (C-248/23)

1. What was the central issue in the Novo Nordisk VAT case before the European Court of Justice (ECJ)? The main issue was whether Novo Nordisk, a pharmaceutical company, was entitled to a reduction in its taxable amount for Value Added Tax (VAT) purposes in Hungary for payments it was legally obligated (ex lege) to make to the Hungarian National Health Insurance Fund Management Agency (NEAK) based on the revenue from publicly funded pharmaceutical products. The Hungarian tax authorities had denied this reduction, arguing that these statutory payments did not constitute a price reduction for VAT purposes.

2. What did the ECJ rule regarding Novo Nordisk’s entitlement to a VAT reduction on these statutory payments? The ECJ ruled in favour of Novo Nordisk, stating that Article 90(1) of the EU VAT Directive precludes national legislation that prevents a pharmaceutical company from reducing its taxable amount for VAT on mandatory payments made to a state health insurance agency based on sales of publicly funded medicines. The Court considered these payments to be akin to a price reduction after the supply had taken place.

3. What is the significance of Article 90(1) of the EU VAT Directive in this context? Article 90(1) of the EU VAT Directive mandates that the taxable amount for VAT should be reduced in cases of cancellation, refusal, total or partial non-payment, or where the price is reduced after the supply takes place. This principle ensures that VAT is ultimately levied only on the amount of consideration the supplier actually receives. The ECJ interpreted the statutory payments by Novo Nordisk as a form of price reduction falling under this article.

4. Why did the Hungarian tax authorities argue that these statutory payments should not lead to a VAT reduction? The Hungarian tax authorities contended that the statutory payments were not a price reduction because they were not provided directly to the final consumer but rather to the state health insurance agency. They also argued that these payments were more akin to a tax intended to achieve budgetary and health objectives, and thus should be included in the taxable amount.

5. How did the ECJ address the argument that the payments were not made to the final consumer? The ECJ reiterated its previous case law, stating that the fact that the direct beneficiary of the medicinal products (the insured patients) is not the state health insurance agency does not break the direct link between the supply and the consideration. As the health insurance agency reimburses the pharmacies and is the ultimate bearer of the cost reduction, it should be considered the final consumer for the purpose of determining the taxable amount. The amount of VAT should not exceed the amount effectively paid by this final consumer.

6. What was the ECJ’s view on the Hungarian argument that the payments were a form of tax? While acknowledging that Member States can introduce certain taxes, duties, or charges, the ECJ emphasised that this does not prevent such payments from being considered a price reduction for VAT purposes under Article 90(1) if they effectively reduce the consideration received by the supplier. The Court noted that the statutory obligation led to Novo Nordisk not receiving the full sale price of its products.

7. How did the fact that other deductions (price volume agreements, R&D expenses) were permitted influence the ECJ’s decision? The fact that Hungarian legislation allowed deductions for payments under price volume agreements and R&D expenses while denying a deduction for the ex lege payments was highlighted by the referring court. The ECJ’s ruling that the ex lege payments also constitute a price reduction reinforces the principle of fiscal neutrality, ensuring consistent treatment of reductions in the effective consideration received by the pharmaceutical company. The disparate treatment suggested the ex lege payments had a similar economic effect to other permissible deductions.

8. What is the broader implication of this ruling for pharmaceutical companies and VAT on publicly funded medicines in the EU? This ruling clarifies that mandatory payments made by pharmaceutical companies to state health insurance agencies, which effectively reduce the revenue received from the sale of publicly funded medicines, should generally be treated as price reductions for VAT purposes across the European Union. National legislation that unduly restricts the application of Article 90(1) in such scenarios may be incompatible with EU law. This ensures that VAT is levied only on the net amount received by the pharmaceutical company after these mandatory contributions.

Study Guide: ECJ Ruling on Novo Nordisk VAT Case (C-248/23)

Quiz

What was the core issue brought before the European Court of Justice (ECJ) in the Novo Nordisk case (C-248/23)?
According to the ECJ’s ruling, how should the ex lege payments made by Novo Nordisk to the Hungarian National Health Insurance Fund Management Agency (NEAK) be treated for Value Added Tax (VAT) purposes?
What fundamental principle of the EU VAT Directive, specifically Article 90(1), underpinned the ECJ’s decision in favour of Novo Nordisk? Explain this principle briefly.
What were the main arguments put forward by the Hungarian tax authorities for denying Novo Nordisk a VAT reduction on the statutory payments made to the NEAK?
How did the ECJ address the Hungarian argument that the ex lege payments were not made directly to the final consumers of the medicinal products?
What was the ECJ’s response to the argument from the Hungarian authorities that the ex lege payments should be considered a tax rather than a price reduction?
What was the relevance of the fact that Hungarian legislation permitted VAT deductions for payments made under price volume agreements and for research and development (R&D) expenses?
Explain the concept of fiscal neutrality in the context of VAT and how it relates to the ECJ’s ruling in the Novo Nordisk case.
What is the practical implication of the ECJ’s ruling for pharmaceutical companies within the European Union that are obligated to make similar statutory payments on publicly funded medicines?
How does the ECJ’s interpretation of Article 90(1) in this case align with the broader purpose of the VAT system as described in the judgment?

Quiz Answer Key

The central issue was whether Novo Nordisk was entitled to a reduction in its taxable amount for VAT in Hungary for legally mandated (ex lege) payments it made to the NEAK based on revenue from publicly funded pharmaceutical products. The Hungarian tax authorities had denied this reduction.
The ECJ ruled that these ex lege payments should be treated as a price reduction after the supply has taken place, and therefore Novo Nordisk is entitled to a corresponding reduction in its taxable amount for VAT. National legislation preventing this is incompatible with EU law.
Article 90(1) of the EU VAT Directive mandates that the taxable amount shall be reduced where the price is reduced after the supply takes place. This ensures that VAT is levied only on the consideration actually received by the supplier, upholding the principle of fiscal neutrality.
The Hungarian tax authorities argued that the statutory payments were not a price reduction because they were not made directly to the final consumer but to the state health insurance agency. They also contended that these payments were akin to a tax aimed at achieving budgetary and health objectives.
The ECJ stated that the fact that the insured patients were the direct beneficiaries did not break the link between the supply and the consideration. As the NEAK reimburses pharmacies and ultimately bears the cost reduction, it should be considered the final consumer for VAT purposes, and the VAT amount should not exceed what this final consumer effectively pays.
While acknowledging that Member States can introduce taxes, duties, and charges, the ECJ clarified that this does not prevent a payment from being considered a price reduction for VAT purposes under Article 90(1) if it effectively reduces the consideration received by the supplier. The Court noted that the ex lege obligation meant Novo Nordisk did not receive the full sale price.
The fact that Hungarian law allowed deductions for price volume agreements and R&D expenses, while denying it for the ex lege payments, highlighted an inconsistency. The ECJ’s ruling ensures similar economic effects (reductions in received consideration) are treated consistently under the principle of fiscal neutrality.
Fiscal neutrality in VAT means that the tax should be levied in a way that does not distort competition or the free movement of goods and services. The ECJ’s ruling upholds this principle by ensuring VAT is applied only to the net amount Novo Nordisk effectively receives after the mandatory payments, similar to other permitted deductions.
The ruling suggests that pharmaceutical companies across the EU making similar mandatory payments to state health insurance agencies on publicly funded medicines should generally be entitled to a VAT reduction on these payments. National laws unduly restricting this might be incompatible with EU law, ensuring VAT is levied on the net revenue received.
The ECJ’s interpretation aligns with the purpose of the VAT system to tax only the final consumer and to be neutral for taxable persons involved in the supply chain. By allowing the reduction, the Court ensures that VAT is levied on the actual economic benefit derived by Novo Nordisk, preventing the tax authorities from collecting VAT on amounts the company was legally obligated to pay away.

Essay Format Questions

Critically analyse the ECJ’s reasoning in Case C-248/23 (Novo Nordisk) regarding the interpretation of Article 90(1) of the VAT Directive and its application to mandatory payments to state health insurance agencies. Discuss the key principles and arguments presented by the Court and the implications for national VAT legislation.
Discuss the principle of fiscal neutrality in the context of the EU VAT system. How did this principle influence the ECJ’s decision in the Novo Nordisk case, and why is it considered a fundamental aspect of the VAT Directive?
Compare and contrast the treatment of price reductions arising from contractual agreements (such as price volume agreements) and those imposed by law (ex lege obligations) under Article 90(1) of the VAT Directive, as highlighted in the Novo Nordisk judgment. What justifications might national authorities offer for differential treatment, and why did the ECJ reject these in this case?
Evaluate the arguments presented by the Hungarian tax authorities in the Novo Nordisk case for classifying the mandatory payments as a tax rather than a price reduction. Why did the ECJ ultimately disagree with this classification in the context of Article 90(1) and the broader VAT framework?
Considering the ECJ’s ruling in Case C-248/23, what potential challenges or areas of uncertainty might arise for pharmaceutical companies and national tax authorities in implementing this judgment across different Member States with varying healthcare funding and pharmaceutical pricing regulations?

Glossary of Key Terms

Value Added Tax (VAT): A consumption tax assessed on the value added to goods and services at each stage of production or distribution. It is ultimately borne by the final consumer.
Ex lege: A Latin term meaning “by operation of law” or “as a matter of law.” In this context, it refers to obligations or payments imposed directly by statute or legislation, rather than by agreement.
Preliminary Ruling: A procedure under Article 267 of the Treaty on the Functioning of the European Union (TFEU) that allows national courts of Member States to refer questions concerning the interpretation of EU law to the Court of Justice of the European Union (CJEU).
Taxable Amount: The value on which VAT is calculated. According to Article 73 of the VAT Directive, it includes everything which constitutes the consideration obtained or to be obtained by the supplier.
Fiscal Neutrality: A fundamental principle of the EU VAT system, which dictates that VAT should be applied in a way that does not distort competition or the free movement of goods and services. It implies that similar transactions should be subject to the same VAT treatment.
Common System of Value Added Tax (VAT Directive) (Directive 2006/112/EC): The EU directive that harmonises the rules governing VAT across the Member States.
National Health Insurance Fund Management Agency (NEAK) (Hungary): The Hungarian public body responsible for managing the national health insurance system, including the subsidisation of certain medicines.
Price Volume Agreement: An agreement, in this context, between a pharmaceutical company and a health insurance agency where the company may offer discounts or rebates based on the volume of sales of subsidised medicines.
Consideration: The payment or other value received by the supplier in return for the supply of goods or services. It forms the basis for the taxable amount for VAT.
Final Consumer: The ultimate user of goods or services who bears the burden of the VAT. In this specific context, the ECJ considered the NEAK to be acting in a role akin to the final consumer due to its reimbursement of costs.