Novo Nordisk sold pharmaceuticals on the Hungarian market within the framework of the Hungarian subsidy system for prescription drugs. Companies whose products were partially subsidized by the Hungarian high-cost protection scheme had to forgo part of the compensation for sold pharmaceuticals, both contractually and through a statutory fee.

The pharmaceuticals were sold through a distribution chain where Novo Nordisk sold the pharmaceuticals to wholesalers, who in turn sold them to pharmacies, which then sold the pharmaceuticals to private individuals in need of medication. The pharmaceuticals were subsidized by the state body NEAK when sold from pharmacies to private individuals. To be able to sell pharmaceuticals within the subsidized system, Novo Nordisk was obliged to make a payment to NEAK contractually and a fee collected and administered by the Hungarian tax authority, which was then forwarded to NEAK.

The issue in the case was whether the fee that Novo Nordisk was obliged to pay to the Hungarian tax authority by law entitled Novo Nordisk to reduce the taxable amount for VAT. The contractual part of the fee had already been established by the CJEU in case C-717/19, Boeringer (II), to give the right to reduce the taxable amount.
The Hungarian tax authority argued that the fact that the fee was collected as a tax meant that there was no direct link between the fee and the taxable sales transaction for the company. Therefore, the fee should not entitle a reduction of the taxable amount. However, the CJEU found that such an interpretation was not consistent with the principle of neutrality and that Novo Nordisk therefore had the right to reduce the taxable amount by an amount corresponding to the fee paid to the Hungarian tax authority. This was despite neither the Hungarian tax authority nor NEAK being a direct party in the transaction chain.

Our Comment

The CJEU once again confirms that the principle of neutrality is fundamental to the VAT system and that a taxpayer should not pay more VAT than on the compensation they ultimately received. Since part of the compensation that Novo Nordisk received for its sales could not be retained, the price of the pharmaceuticals should be considered reduced after the transaction took place. Novo Nordisk therefore had the right to reduce its taxable amount.

In our opinion, the CJEU’s ruling strengthens the position of the principle of neutrality when assessing what should be included in the taxable amount. The Court's decision clarifies that in cases where a taxpayer has not been able to dispose of the entire compensation received due to subsidies or discounts, they should have the right to reduce the taxable amount. This applies regardless of whether it occurs on a contractual basis or due to law. The reasoning also indicates that it is the individual company's situation that should be considered. The Court does not mention that consideration should be given to other actors in the distribution chain.
The CJEU ruling should be good news for companies that provide discounts or subsidies not only to their direct customers but also to other actors in the distribution chain. We believe that the judgment strengthens these companies' ability to reduce the taxable amount for VAT.

Finally, it can be noted that the distribution chain for the pharmaceuticals and the way they were financed under the Hungarian system has great similarities with the Swedish system for high-cost protection. For Sweden, the Supreme Administrative Court in its judgment in the case HFD 2023 ref. 48, previously established that a pharmaceutical company does not have the right to reduce VAT based on the subsidies provided to the Regions for pharmaceutical sales covered by high-cost protection. This is because the Swedish VAT law stipulates a so-called qualified exemption (e.g. zero rating with input VAT recovery) in the final stage of the distribution chain, i.e., from pharmacy to customer. The Supreme Administrative Court therefore considered that the end consumer was not burdened with VAT and that there was therefore no VAT to reduce in earlier stages of the supply chain either. The Supreme Administrative Court did not deem it necessary to seek a preliminary ruling from the CJEU.

We note that the CJEU in the Novo Nordisk case once again highlights that it is the individual taxpayer's situation that should be decisive and that they should pay VAT on an amount corresponding to the compensation they can dispose of after discounts. It is therefore regrettable that the Supreme Administrative Court chose to forgo the opportunity to get the CJEU's view on the matter. In our opinion, it cannot be ruled out that the CJEU would disagree with the Supreme Administrative Court's reasoning, why it would be interesting to have the matter re-examined via a preliminary ruling from the CJEU.

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