Kombinovaný model dodania liekov - rozsudok NSS ČR vo veci Eli Lilly

Czech Supreme Administrative Court addressed VAT on medicines supplies (Eli Lilly case)

The Czech Supreme Administrative Court (SAC) published a judgment in the case 3 Afs 54/2020-73 Eli Lilly. In the judgement, the SAC dealt with the issue whether a marketing service invoiced by a Czech distributor of medicines to its parent company in Switzerland constituted (i) a separate supply of service taxable in Switzerland or (ii) was subject to Czech VAT as an ancillary supply to the principal supply of medicines (the supply of marketing services should thus be included in the tax base for the sale of medicines, as originally proposed by the lower court).

The conclusion of the SAC is positive, since the company Eli Lilly won the dispute. This is good news for the pharmaceutical industry, where price regulation forces distributors to gain their profitability through similar arrangements - combining the supplies of medicines at regulated prices with provision of marketing services to a foreign supplier.

In particular, the SAC stated that a foreign supplier (Swiss parent company in this case) may have a genuine interest in promoting its products in the Czech Republic. It is capable of receiving a marketing service from a Czech distributor despite it may not be the manufacturer of the distributed drugs. In this context, the SAC emphasizes the importance of contractual documentation.

Being bound by the subject matter of the dispute, the SAC did not examine in detail the scope of the marketing services nor did it analyze the method of how the related remuneration was determined.

Although we consider the judgment to be favorable for the business, in our opinion it cannot be automatically applied to group payments for “any and all” marketing services arbitrarily. The SAC thoroughly examined the genuineness and commercial substance of the transaction, and the result of that examination significantly influenced its conclusion. In the context of the existing price regulation in medicines’ supplies, the payments for marketing services are sometimes seen to be used by businesses to help distributor achieve a more reasonable balance as regards the profitability. In our view, it is always necessary to assess in a particular case whether payments received from third parties constitute solely the remuneration for a service provided. If negative, the result of the potential dispute might not be as favorable as is the result of the recent court decision.

Despite the conclusions of the Czech courts, the topic will in our view continue to be subject of further discussions in the Slovak conditions. This will particularly be true with regard to setup of contractual arrangements in the combined model of supplies (services and goods flowing through the same entity), with regard to aspects of financial accounts reporting, and in assessing impacts to business in the area of medicines price regulation.

The specifics of operating the combined model of supplies of medicines after the Eli Lilly court decision from the tax and regulatory point of view will be discussed also during the EY webinar "Tax specifics of the pharmaceutical industry". The webinar will take place on Tuesday, December 14, 2021. Register now here.

If you have any questions, please contact the authors of the article or your usual engagement team in EY.