Clawbacks negotiated on the price of pharmaceutical products and pharmaceutical companies’ turnover defined

First application of the Boehringer decision of the European Court of Justice ("ECJ") by an Administrative Court of Appeal (Cour administrative d’appel). Administrative Court of Appeal of Versailles, January 28, 2020, SAS Novartis Pharma, n° 17VE02907.

Under Article L.162-18 of the French Social Security Code, companies selling pharmaceutical products reimbursable to health insurance beneficiaries may undertake to grant the French National Health Insurance Fund (Caisse nationale d’assurance maladie) clawbacks on all or part of their products sales. These clawbacks are negotiated in price agreements with the Economic Committee for Healthcare Products (Comité économique des produits de santé - "CEPS"). They are known as "product clawbacks".

Pharmaceutical companies rightly consider that the repayment of these sales to health insurance providers should be deducted from their taxable turnover.

This "economic reality" had to be legally accepted. It was finally enshrined by the Administrative Court of Appeal of Versailles in a decision dated January 28, 2020 in which the Court reversed its jurisprudential trend and applied the ECJ Boehringer decision of December 20, 2017.

Let us recall that pharmaceutical companies and French authorities held antagonistic positions on this subject for several years. They disagreed not only as regards VAT, but also with regard to other French taxes on turnover. Examples of these taxes on turnover include the company value-added tax (cotisation sur la valeur ajoutée des entreprises – CVAE), the company social-solidarity tax (contribution sociale de solidarité des sociétés – C3S) and other pharmaceutical-specific taxes on revenue pursuant to the French Social Security Code.

Practitioners and doctrinal writings were the first to confuse the legal and economic nature of product clawbacks. These clawbacks were assimilated to payments made pursuant to "safeguard clause" in the form of clawbacks1.

This confusion then allowed public authorities to qualify clawbacks as "penalties", and as such, refuse their deduction from the taxable turnover of pharmaceutical companies. Courts followed this characterization2 despite having to deal with economic and legal constraints, in addition to the intelligibility of the law. The political ruling of January 28, 2020 was likely to rock the boat.

Several EU Member States already allowed pharmaceutical companies to deduct clawbacks paid to health insurance providers from their tax base.

Since 2010, Germany has allowed pharmaceutical companies paying clawbacks into the public health insurance system to deduce these clawbacks from their VAT tax base. The ECJ ruled, in the Boehringer decision of December 20, 20173 (C-462/16), that, "a rebate [clawback] granted, under national law, by a pharmaceutical company to a private health insurance entails, within the meaning of that Article [Article 90 (1) of Council Directive 2006/112/EC of November 28, 2006], a reduction in the tax basis in favor of that pharmaceutical company”, where private health insurance providers reimbursed their customers for costs they incurred in purchasing those products.

In France, the Boehringer decision was rendered at a time when national Courts were busy with ongoing litigation on the disputed deductibility of clawbacks paid into the public health insurance system from VAT and non-VAT French taxable bases. This decision thus, raised hopes, provided that it invalidated the reasoning of the German administration, similar to that of the French administration, on grounds of VAT neutrality and equal treatment under EU law.

At the national level, in 2018, a first instance Court took a first step towards reversing the trend in case law4. However, French tax authorities took advantage of this situation to develop new arguments, on grounds of a supposed distinction between the German private health insurance system and the French public health insurance system. In reality, the two systems operate in similar ways, and this is precisely what Novartis argued before the Court of Appeal of Versailles.

The Court of Appeal of Versailles explicitly rejected all the arguments developed by the French tax authorities, and considered irrelevant whether clawbacks had a legal or conventional origin, or whether they fell within the framework of the regulation of health expenditure as alleged "penalties".

Furthermore, the Court merely observed that “is also inoperative the fact that the repayment of clawbacks is part of the participation in the financing of social security for companies in the sector with a view to regulating health expenditure and would present, in this context, and as the Minister describes it, the nature of a penalty”.

In support of its reasoning, the Court of Appeal of Versailles stated that health insurance providers must be regarded as the final consumer benefiting from the clawbacks, concluding that “this repayment participates, in accordance with the clauses in the agreements concluded with the CEPS, in the determination of the price of the pharmaceutical products that is actually received by the company”.

Finally, explicitly taking over the interpretation of the VAT Directive (2006/112/EC of November 28, 2006) provided in Boehringer, the Court of Appeal of Versailles held that, pursuant to the principle of VAT neutrality, the taxable basis of Novartis should be reduced by the amount of clawbacks granted to the public health insurance system.

One may consider this decision as an opportunity to not only deduct product clawbacks negotiated with the CEPS from pharma companies’ taxable turnover, but to also deduct payments under the French "safeguard clause" on the pharmaceutical products market sales (and the former "safeguard clause” on sales of hepatitis C products5). In our opinion, this position does not seem well-founded. This "economic reality"6 in fact leads to the deduction of clawbacks, defining the net price of pharmaceutical products, and not of related taxes.

In any event, this is the first time that a French Administrative Court of Appeal has ruled this way, and it may be the new course for the French Courts although the Ministry is likely to appeal this decision before the Supreme Court.

It is regrettable that the same “economic reality” did not lead the Court of Appeal of Versailles to a similar conclusion in a decision it rendered the same day concerning another French tax on sales (the CVAE)7.

We can only hope that this very positive development will contribute to the unification of French Courts' case law on the definition of taxable turnover of pharmaceutical companies.


1The "safeguard clause" is a financial regulation mechanism for the market of reimbursable pharmaceutical products, created by the Social Security Financing Act for 1999 (Articles L.138-10 et seq. of the Social Security Code). Its purpose is to limit health insurance expenditure and, ultimately, to "sanction" the operators who contribute most to this expenditure. A similar mechanism was introduced by the Social Security Financing Act for 2014 to regulate the market for medicines intended to treat hepatitis C (Articles L.138-19-4 et seq. of the Social Security Code in force from 2014 to 2016).

2Notably with respect to the contribution(s) on turnover, provided for in Article L.245-6 of the Social Security Code : Supreme Court , November 6, 2014, Roche, n° 13-26.568 ; Paris Social Security Court, November 8, 2016, Alexion Pharma France, n° 15-02466. With regard to VAT: Paris Administrative Court of Appeal, December 30, 2016, Celgene, n° 15PA02816 ; Montreuil Administrative Court, July 4, 2017, Novartis Pharma, n° 1508537. With regard to the contribution on the added value of companies (CVAE) : Council of State (French Administrative Supreme Court), October 14, 2019, MSD Chibret Schering Plough, n° 418455 ; Council of State (French Administrative Supreme Court), April 21, 2017, Pierre Fabre Médicament, n° 398246 ; Montreuil Administrative Court, June 22, 2017, Novartis Pharma, nos 1505726 and 1505728 ; Council of State (French Administrative Supreme Court), October 6, 2017, AstraZeneca, n° 408115 ; Versailles Administrative Court of Appeal, November 6, 2018, MSD France, n° 16VE03886 ; Versailles Administrative Court of Appeal, November 27, 2018, Merck Sharp and Dohme-Chibret Laboratories, n° 17VE00637 ; Versailles Administrative Court of Appeal, March 26, 2019, AstraZeneca, n° 17VE00878.

3ECJ, December 20, 2017, Finanzamt Bingen-Alzey v Boehringer Ingelheim Pharma GmbH & Co KG, Case C-462/16.

4Montreuil Administrative Court, March 8, 2018, Janssen Cilag, n°1610153.

5Contribution in respect of medicines for the treatment of hepatitis C governed by the provisions of Articles L.138-19-4 of the Social Security Code, in force from 2014 to 2016.

6Conclusions of Mr Christophe Huon, Public Rapporteur, Versailles Administrative Court of Appeal, 3rd Chamber, January 28, 2020, n° 17VE02907, SAS Novartis Pharma.

7Versailles Administrative Court of Appeal, January 28, 2020, n° 17VE02790, SAS Novartis Pharma.


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