Fundamental Judgement of the Supreme Administrative Court for the Pharma Industry

At the end of November, the Supreme Administrative Court published a breakthrough judgment for the pharmaceutical sector in case 3 Afs 54/2020-73 Eli Lilly. That judgment concerned the provision of marketing services by a pharmaceutical distributor to a foreign entity belonging to the same group of companies in order to ensure profitability, which could not be achieved in a standard way because of price regulation.

The subject matter of the original dispute was whether the marketing service charged to Switzerland constituted an independent supply, i.e. whether it was to be treated under the reverse charge mechanism, or whether it constituted part of the consideration for the sale of medicinal products in the Czech Republic as an ancillary supply and was therefore to be subject to Czech VAT. The Supreme Administrative Court (SAC) did not agree with the opinion of the Municipal Court that these two supplies were closely related and had a single objective, i.e., the sale of pharmaceuticals to end customers in the Czech Republic. This is a positive result for the pharma industry.

Main arguments

The SAC states that it is not possible to simply claim that the recipient of the marketing service is the final link in the chain, i.e. the patient. According to the SAC, it is necessary to acknowledge the complexity of trading on a strictly regulated market with pharmaceuticals, where there are various entities that may be influenced, to varying degrees, by marketing information or may use it in a certain way. In the opinion of the SAC, the recipient of the marketing service is a foreign entity from the Eli Lilly Group, which has a substantial interest in supporting the sale of pharmaceuticals, which it sells through a Czech distributor – and thus in the course of its economic activity – in the territory of the Czech Republic.

Furthermore, the SAC also states that, in the light of the above arguments on marketing services, it cannot be concluded that the distribution of medicinal products and the provision of marketing services constitute a single indivisible supply, since each of those services is provided to different persons. That assertion is supported by the argument that medicinal products may also be purchased by customers who have not received the marketing information or, on the contrary, medicinal products may not be purchased by customers who have received it. The link between the marketing and sale of pharmaceuticals is thus very loose and may not exist at all.

In concluding its decision, the SAC states that the distribution of pharmaceutical products and the provision of marketing services in this case constitute different supplies and therefore not a single supply. Thus, only the sale of pharmaceuticals can enter the VAT base.

What does the judgment imply?

Although we view the conclusions of this judgment positively, we would like to draw attention to the fact that the judgment itself did not assess in more detail the specific scope of marketing services or the method of determining the related consideration. We therefore consider that it is still necessary to assess each distribution model separately and that the conclusions of the judgment cannot be applied uniformly.

Indirect Taxes VAT

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