Clinical trials and tax issues
Economic justification of expenses
Free service to manufacturer
Tax treatment of expenditure on observational programmes


When a new medicine is released for general circulation, particularly in a developing pharmaceuticals market, it is vital to obtain as much information as possible about its properties, efficacy and possible side effects. A company that sells such products may obtain the required information by conducting post-marketing observational research once the medicine is on the market. However, this raises questions about the tax treatment of such research, given that the medicine has already been registered and the developer or manufacturer has already conducted pre-clinical and clinical trials. This update considers the issues facing the tax authorities and the problems that a pharmaceutical company may encounter in seeking to deduct such expenses from its taxable profit.

Observational studies and tax issues

If a pharmaceutical company which is an official distributor or an importer, but not a manufacturer, brings a new medicinal product to market, the law does not require it to conduct clinical trials of the product. Although it allows the manufacturer to undertake such trials,(1) the law is silent on whether the vendor is entitled to do so. However, it is in the vendor's interests to obtain information on the medicine and its effects.

Post-registration clinical trials for a medicine are carried out by a manufacturer "for the purpose of gathering additional information on its safety and effectiveness, for gaining a broader picture of how to apply the medicine in question and also revealing undesirable reactions from patients".(2)

However, the vendor's aims relate more to marketing than to scientific evaluation. Usually, a third-party organisation is engaged to carry out the fieldwork and gather data about the medicine, including information from doctors. Such observational studies often meet several objectives: the medicine becomes better known, safety data is obtained for regulatory bodies and the positive results of the research can be used to promote the medicine.

The problem is that the tax authorities may regard the observational programmes and the clinical trials in the same way for the purposes of the Law on the Circulation of Medicinal Products. If so, they may refuse to allow the vendor to deduct its expenditure on such programmes if they consider that that it does not constitute reasonable expenditure, given that clinical trials have been conducted. The authorities acknowledge a manufacturer's right to deduct expenses on clinical trials.(3)

Moreover, in some cases the tax authorities have held that a vendor which has conducted observational research has performed a service free of charge for a third party (ie, the manufacturer). This precludes the deduction of expenses incurred in conducting the research, since property, work or services provided free of charge cannot be included in the profit tax base.(5)

Economic justification of expenses

Under Article 252(1) of the Tax Code, expenses to be deducted for profit tax purposes must be:

  • justified in economic terms;
  • supported by documentary proof; and
  • incurred in carrying out an activity for profit-making purposes.

The economic justification for a vendor's research is related to its interest in selling a medicine more effectively by obtaining as much information as possible on its properties, applications and effects. Information on a medicine's efficacy makes it easier to predict future demand and to forecast the company's future financial results.

A challenge by the tax authorities to the effect that a vendor's expenses on clinical trials are unjustified is essentially an assessment of the economic reasonableness of such expenses. However, 'reasonableness' and 'economic justification' are distinct concepts and the tax authorities are not competent to assess the reasonableness of expenses.

As the Constitutional Court has stated on a number of occasions, business entities may exercise independence and a wide discretion when making commercial decisions. Tax legislation does not employ the concept of 'reasonableness'; nor does it govern the procedure and terms on which financial and business activities are conducted. Therefore, if certain expenses reduce the total income received for tax purposes, the issue of justification may not be assessed by the criterion of whether such expenses are reasonable, rational or effective, or in terms of the results that they achieve.(6)

In order for expenses to be recognised for profit tax purposes, they must be incurred for the purpose of making a profit. The justifiability of expenses is determined not by whether the company makes a profit in a particular tax period, but by whether such expenses were aimed at making a profit. On this basis, it is at least arguable that expenses for observational research may be deducted even if such research has not produced positive results.

The company in question should state in its internal documents (eg, its commercial policy and policy documents on marketing, product sales and promotion) that it is attempting to increase sales volume by conducting observational experiments. This will help to justify the related expenses if, for example, the research results lead the company to conclude that it should cease selling an ineffective medicine. If the trials produce a positive result, the company may wish to supplement the internal documents with analytical data on the rise in sales income following the clinical research.

Free service to manufacturer

There is no reasonable basis for the view that conducting something akin to a clinical trial constitutes a service provided free of charge to a manufacturer. In order to conclude that a party has received work free of charge, it is necessary to have a direct expression of that party's intent. For example, such an expression of intent might be set out in an agreement between a vendor and a manufacturer, explictly stating that the company is paying for research conducted on the manufacturer's behalf.

The Russian courts consider that clear intention to transfer property as a gift is a necessary feature of a transfer of property free of charge;(7) there must be evidence of the owner's will to dispose of the property in favour of another person, with no property obligations being assumed by the latter.(8) Therefore, a service cannot be said to be provided free of charge to a manufacturer in this sense if no such intention has been established on the part of the vendor (which needs the research data in order to sell the product effectively).

Tax treatment of expenditure on observational programmes

It is strongly arguable that expenditure on observational programmes may be treated as expenses on market research.(9) By their nature, such expenses fall within the category of 'other expenses connected with manufacture and sale' for the purpose of Articles 252(2) and (3) of the code. Under Article 272(7), such expenses should be recognised on:

  • the date of payment;
  • the date on which documents are presented to confirm the expenses; or
  • the last day of the period to which the expenses relate.

In practice, the relevant date is usually the date of the transfer and acceptance certificate for the services rendered (or the date of receipt, if the certificate is received after the period in which it is executed by the service provider). However, the tax authorities may consider that the expenses should be written off on a straight-line basis over the period in which the results of the research are used (eg, the period during which the company in question plans to sell the medicine).

Such claims are likely to be untenable for two reasons. First, market research will already have been carried out in respect of the medicine, which may be sold for an unlimited period. Second, such expenses are indirect expenses which may be written off on a one-off basis.

This position is supported by court practice. For instance, in 2008 the Moscow Arbitrazh Court ruled that it was lawful to make a one-off deduction for expenses incurred in obtaining a collection of photographs of fungi for use in training sessions on medicines.(10) The court noted that there is no provision in tax accounting rules for other expenses to be capitalised, and that they should be deducted on a one-off basis. Expenses must be deducted on a straight-line basis across several reporting periods when, under the terms of an agreement, provision is made for use of a particular asset that is being acquired over more than one tax period (with income being obtained therefrom over more than one tax period).(11)


Expenses for observational research in respect of a medicine which is in general circulation and being sold by a pharmaceutical company may be deducted on a one-off basis during the period in which the transfer and acceptance certificate is received and signed by the entity carrying out the research. However, this analysis presupposes that the company has not established a fixed period during which the product will be sold.

For further information on this topic please contact Julia Alexandrova at Pepeliaev Group by telephone (+7 495 967 0007), fax (+7 495 967 0008) or email ([email protected]).


(1) Article 4(44) of Federal Law on the Circulation of Medicinal Products (61-FZ), April 12 2010.

(2) Id.

(3) See, for example, Letter 16-15/119127, issued by the Department of the Federal Tax Service for Moscow on November 12 2009.

(4) Resolution 09AP-3512/2007-AK of the Ninth Arbitrazh Appellate Court, April 3 2007.

(5) Article 270(16) of the Tax Code.

(6) Resolution 3-P of the Constitutional Court, February 24 2004, and Rulings 366-O-P and 320-O-P, June 4 2007.

(7) Supreme Arbitrazh Court Resolutions 6745/02 (November 5 2002) and 7030/01 (April 26 2002).

(8) Moscow Arbitrazh Court decisions of July 25 2005 and August 10 2005 in Case A40-35366/05-111-394.

(9) Article 264(1)(27).

(10) Case A40-58275/08-75-242, November 7 2008.

(11) Article 272(1)(3) of the code.