With the issuance of the European Court of Justice's ("ECJ") judgment on 17 January 2013, Spain must change its VAT regulations in relation to pharmaceutical products and medical equipment.
The VAT Directive (Annex III) authorises the EU member states to apply a reduced VAT rate to:
- Pharmaceutical products normally used for health care, prevention of illnesses and as treatment for medical and veterinary purposes, including products used for contraception and sanitary protection
- Medical equipment, aids and other appliances normally intended to alleviate or treat disability, for the exclusive personal use of the disabled, including the repair of such goods, and supply of children's car seats
The scope of the Spanish VAT regulations has been considered as exceeding the VAT Directive, since a 10 percent reduced VAT rate (8 percent before September 2012) was applied, among others, to the following items:
- Medicinal substances which can be used habitually and suitably in the production of medicinal products
The ECJ has considered that the VAT Directive limits the reduced rate to the medicinal substances only if they finished goods which may be used directly by final consumers "for health care, prevention of illnesses and as treatment for medical and veterinary purposes." The Court agrees with Spain that they can be considered as "pharmaceutical products," but also points out that "only finished goods which may be used directly by final consumers" may meet such requirement, as opposed to other substances which may be used in the production of medicinal products, which normally require further processing.
- Medical devices, material, equipment and appliances which, viewed objectively, can be used only to prevent, diagnose, treat, alleviate or cure human or animal illnesses (e.g., a device based in a hospital for any kind of medical measurement)
The ECJ considers that medical equipment cannot be considered as pharmaceutical products and therefore cannot benefit from the reduced rate. Spain was referring to national legislation and also to Article 168 TFEU, which refers to both medicinal products and devices for medical usage as grouped together under the term "pharmaceutical products." However, the Court considered that the concepts used in the Annex Directive should also be interpreted in accordance with the normal sense of the terms at issue, and that medical devices and equipment cannot be regarded as falling within the "pharmaceutical product" concept. It would also be contrary to the aim of applying reduced rates, which is lowering the cost of certain essential goods for final consumers. However, the cost of devices, appliances, material and medical and veterinary equipment would rarely be borne directly by final consumers, since those products are primarily used by healthcare professionals to provide services which themselves may be exempt from VAT.
Spanish reduced VAT rate was also applied to medical aids and equipment used to alleviate physical disability in animals. For the same reasons explained above, the Court considers that standard VAT rate should apply in this case.
- Apparatus and accessories essentially or primarily used to treat human disabilities, but which are not intended for the exclusive personal use of the disabled
The Court considers that the reduced VAT rate can only be applied to such equipment when is directly and exclusively used by the disabled. This would not include apparatus and accessories (used essentially or primarily to alleviate physical disability in humans) which allows different uses or a general use, and thus are not intended for the exclusive personal use of the disabled. Spain was referring to the concept of "disabled" as a broad concept, which would include any person incapacitated by an illness. Spain was also alleging that it is difficult to differentiate between medical devices so as to determine those which are and are not used for disabled persons. But the Court's point here was focused on the "exclusive" and "personal" use, rather than on the "disabled" concept.
In summary, Spain was broadly interpreting Annex III of the Directive, considering that the reduced VAT rate was applicable to all kinds of products (medicinal substance, medical devices and any kind of appliance to alleviate human or animal disability). The Court considers that such concepts must be interpreted strictly as we are facing an exception (i.e., a provision by way of derogation). In addition, they must be interpreted autonomously and uniformly throughout the EU. The Court also focused on the ultimate aim of the measure, which was to lower the cost of certain essential goods for final consumers, rather than apply the reduced VAT rate to the supply chain in the medical sector.
The decision is not applicable immediately. Now Spain must change its Spanish VAT Law. The change may especially affect hospitals, which normally supplies exempt medical services and therefore cannot deduct any VAT borne on the acquisition of goods and services.