Eli Lilly ČR imports pharmaceutical products purchased from Eli Lilly Export S.A. (Swiss sales and marketing hub) into the Czech Republic and Slovakia and distributes them to local distributors. The arrangement between the local company and Eli Lilly Export S.A. is based on a Service Contract in which Eli Lilly ČR is named as the service provider to Eli Lilly Export S.A. (the principal).
Eli Lilly ČR was selling the products at a lower price than the price it purchased them for from Eli Lilly Export S.A. According to the company this was due to local price controls of pharmaceuticals.
Eli Lilly ČR was also paid for providing marketing services by the Swiss HQ, which ensured that Eli Lilly ČR was profitable, despite selling the products at a loss.
Eli Lilly ČR reported the marketing services as a provision of services with the place of supply outside of the Czech Republic; therefore, the income from such supply was exempt from VAT in the Czech Republic.
In 2016 a tax assessment was issued for FY 2011 in which VAT was added to the marketing services-income.
Judgement of the Court
The Court dismissed the appeal of Eli Lilly CR s.r.o. and decided in favour of the tax authorities.
According to the court marketing services constituted partial supply that was part of the distribution activities and should have been considered, from the VAT perspective, a secondary activity used for the purpose of obtaining benefit from the main activity. Therefore, Eli Lilly CR s.r.o should have been paying VAT on income from the marketing services.
“a customer purchasing medicinal products from the claimant is the recipient of a single indivisible supply (distribution and marketing),”
“the aim of such marketing is certainly to increase the customer awareness of medicines distributed by the claimant, and, as a result to increase the marketability of these medicines”
For Eli Lilly Export S.A., marketing was a secondary benefit. Eli Lilly CR s.r.o. was the owner of the products when the marketing services were provided. Eli Lilly Export S.A. was not the manufacturer of the products and did not hold the distribution license for the Czech market. Therefore, Eli Lilly Export S.A. could not be the recipient of the marketing services provided by Eli Lilly CR s.r.o. Hence, the payment received by Eli Lilly CR s.r.o. for marketing services was in fact “a payment received from a third person”.
An appeal to the Supreme Administrative Court was filed on 14 February 2020 by Eli Lilly CR.
Czech vs Eli Lilly 2020