EU Court of Justice rules against Spain's lower VAT rate for pharma and medical equipment

In a ruling issued yesterday, the Court of Justice of the European Union said that Spain has failed to fulfil its obligations under EU law related to the application of a reduced rate of value-added tax to a broader range of goods than provided for under the VAT Directive in the field of pharmaceutical products and medical equipment.

The VAT Directive1 (Annex III) lists the categories of supplies of goods and services to which EU member states may apply a reduced rate of VAT. Those categories include pharmaceutical products normally used for health care, prevention of illnesses and as treatment for medical and veterinary purposes and medical equipment, aids and other appliances normally intended to alleviate or treat disability, for the exclusive personal use of the disabled. Considering that, in that field, Spain was applying a reduced rate to a broader range of categories than provided for under the VAT Directive, the Commission issued a reasoned opinion in November 2010 inviting Spain to comply with it. Spain reiterated its position that the Spanish VAT legislation was in line with the provisions of the VAT Directive. Accordingly, the Commission decided to bring the present action.

Firstly, the Court considers that the application of a reduced rate of VAT to medicinal substances which can be used habitually and suitably in the production of medicine is contrary to the VAT Directive. The directive authorizes the application of a reduced rate of VAT only to finished goods which may be used directly by final consumers, other than goods which may be used in the production of medicinal products, which normally require further processing. That interpretation is corroborated by the purpose of reduced rates, which is to render less onerous, and thus more accessible, certain goods regarded as being particularly necessary to final consumers - who ultimately bear the VAT. However, the Court notes that, where a medicinal substance may be marketed as a finished product without needing to be mixed with other substances - and is thus likely to be used directly by final consumers – a reduced rate of VAT may be applied.