The European Court of Justice (ECJ) passed a ruling on January 17, 2013 (case C-360/11) finding Spain to have failed to fulfil its obligations under Article 98 of Directive 2006/112 (VAT Directive) by its application of a reduced rate of VAT to certain types of pharmaceutical products and medical devices. 

The ruling establishes that the application of a reduced VAT rate to medicinal substances which can be used habitually and suitably in the manufacture of medicinal products to be contrary to the VAT Directive.  In this regard, the ECJ found that the wording of the VAT Directive allows for the application of a reduced VAT rate only to "finished goods which may be used directly by final consumers" and therefore excludes "medicinal substances which can be used habitually and suitably in the manufacturing of medicinal products."

Secondly, the ECJ considered that the VAT Directive does not allow for the application of a reduced VAT rate to "medical devices, material, equipment and appliances which, viewed objectively, can be used only to prevent, diagnose, treat, alleviate or cure human or animal illnesses" as they are not included in the Directive or under the heading of "pharmaceutical products."

Thirdly, the ECJ stated that the application of a reduced VAT rate to "devices or supplementary materials used to treat or alleviate animal illnesses" is contrary to the VAT Directive.

Finally, the ECJ considered that the application of a reduced VAT rate to "devices and supplementary materials that are essential or mainly used to make up for human deficiencies, but not intended for personal and exclusive use by the disabled" to be outside the scope of the VAT Directive.

An adaptation of the Spanish Tax Act, in order to take account of this ruling's findings, is expected shortly.