In brief

A decision by the German Federal Supreme Administrative Court has dealt a blow to tax-driven supply structures in the EU involving flash sales through a Swiss entity without a physical import from Switzerland into the EU. Companies using such structures for the German market should analyze the impact on their models and should explore alternative structures.

The Federal Supreme Administrative Court published a decision dated 25 February 2021 (Case 3 C 1/20) according to which German wholesale distributors of medicinal products may purchase medicinal products only from suppliers holding an authorization issued by an EU member state. A wholesale distribution authorization under Swiss law does not satisfy this requirement.

The case at hand is illustrative of a tax-driven supply model that is not uncommon in the industry, sometimes referred to as "Swiss invoicing" or "virtual import." The German affiliate of a Swiss pharmaceutical company purchased medicinal products from the Swiss parent company, with each company holding a wholesale distribution authorization issued by the competent German and Swiss authority, respectively. The sold products, however, were never physically imported from Switzerland, but were manufactured in France by the French affiliate and shipped directly to Germany without leaving EU territory. The flash sale via the Swiss parent company instead of a direct sale and shipment from the French company was driven by tax considerations. A GDP inspection of the German affiliate by the competent authority found the purchase from the Swiss parent company to qualify as major deficiency. The German company sued against the finding.

According to the decision by the German Federal Supreme Administrative Court, the German company violated the German implementation of Article 80 (1) lit. b) of Directive 2001/83/EC, which provides that wholesale distributors may obtain medicinal products only from persons who are themselves in possession of an (EU) wholesale distribution license or other (EU) authorization. The court rejected the company's argument that its practice fell under the exemption provided by Article 85a, second sentence of Regulation 2001/83/EC, which provides that the selling entity must not hold an EU wholesale distribution authorization "where a product is directly received from a third country but not imported," citing the legislative intent to protect the supply chain from falsified medicines. The Federal Supreme Administrative Court also stated that the purchase from a Swiss entity does not qualify as "import" absent a physical importation into the EU, thereby rejecting the notion of a "virtual import."

The decision by the German Federal Supreme Administrative Court deals a significant blow to tax-driven supply models that involve a flash sale via non-EU member states without a physical import from such non-EU member state into the EU. The decision should be expected to embolden the competent German state regulators to focus on such supply structures in GDP inspections going forward. Companies currently using such supply models should consider analyzing in detail whether and to what extent the decision applies to their specific model for Germany and, where appropriate, proactively explore alternative solutions, taking into account the regulatory landscape in the other EU member states.