Flashback on ECJ Cases C-481/98 (Commission v France) – Different medicinal-product rates respected fiscal neutrality

On 3 May 2001, the ECJ issued its judgment in Case C-481/98, Commission v France. [eur-lex.europa.eu]

Summary

• Facts: France applied a 2.1% VAT rate to medicinal products reimbursable under the social security system and a 5.5% rate to other medicinal products. The Commission argued that applying different rates to medicinal products infringed Article 12 of the Sixth VAT Directive and fiscal neutrality. [eur-lex.europa.eu]
• Issue: The dispute concerned whether France could retain a rate below the 5% minimum under Article 28(2)(a) of Sixth Council Directive 77/388/EEC of 17 May 1977, and whether reimbursable and non-reimbursable medicinal products were similar competing products requiring equal VAT treatment. [eur-lex.europa.eu]
• Question to the Court: No preliminary question was referred. The Commission brought an infringement action seeking a declaration that France had failed to fulfil its obligations under Article 12 of the Sixth Directive by maintaining the two reduced rates. [eur-lex.europa.eu]
• Decision: The Court dismissed the action. It found that the 2.1% rate satisfied the transitional conditions and that reimbursable and non-reimbursable medicinal products were not similar products in competition for the purposes of fiscal neutrality. [eur-lex.europa.eu]
• Argumentation: Inclusion on the reimbursable-products list was based on objective criteria. Reimbursement, rather than the lower VAT rate, gave those products their decisive consumer advantage. The 2.1% rate also pursued a clearly defined social objective benefiting the social security system and final consumers. [eur-lex.europa.eu]

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Facts

• Article 281g of the French General Tax Code applied a VAT rate of 2.1% to medicinal products reimbursable under the social security system. Other medicinal products were taxed at 5.5%.
• A medicinal product could be included on the reimbursable list only after receiving marketing authorisation and satisfying objective criteria concerning therapeutic effectiveness or savings in the cost of treatment.
• The Commission considered that all medicinal products were similar because they shared curative or preventive properties. It argued that applying different VAT rates according to reimbursement status infringed VAT uniformity, fiscal neutrality and the prohibition of distortions of competition.
• France maintained that reimbursable medicinal products formed an objectively distinct category and that the 2.1% rate pursued clearly defined social reasons. Finland intervened in support of France. [eur-lex.europa.eu]

Issue

• • Article 12(3)(a) of Sixth Council Directive 77/388/EEC, as amended by Directive 92/77/EEC, generally required reduced VAT rates to be no lower than 5%.
  • Article 28(2)(a) nevertheless permitted Member States to maintain lower rates that:

1. 1. Were in force on 1 January 1991.
   2. Were consistent with Community law.
   3. Satisfied the conditions in the final indent of Article 17 of Second Council Directive 67/228/EEC.

• The Court therefore had to assess whether the French rate respected fiscal neutrality and whether it had been maintained for clearly defined social reasons and for the benefit of final consumers. [eur-lex.europa.eu]

Questions Referred

No questions were referred. The case concerned an infringement action brought by the Commission under Article 169 of the EC Treaty, subsequently Article 226 EC.

The Commission requested a declaration that, by introducing and maintaining legislation applying a 2.1% rate to reimbursable medicinal products while applying a 5.5% rate to other medicinal products, France had failed to fulfil its obligations under Article 12 of the Sixth Directive. [eur-lex.europa.eu]

Advocate General’s Opinion

Advocate General Jean Mischo delivered an Opinion on 6 December 2000.

The Advocate General considered that reimbursement status objectively differentiated the products in the market. A product’s inclusion in the reimbursement system had a stronger influence on consumer choice than the difference between the two VAT rates. The lower rate also reduced costs for the social security system and patients.

The Advocate General proposed that the Court:

1. Dismiss the application;
2. Order the Commission of the European Communities to pay the costs;
3. Order the Republic of Finland to bear its own costs.

The Court followed that proposed outcome.

Decision

The Court ruled as follows:

1. Dismisses the action;
2. Orders the Commission of the European Communities to pay the costs;
3. Orders the Republic of Finland to bear its own costs.

In practice, the ruling confirms that fiscal neutrality does not require identical rates for products merely because they share broad characteristics. The relevant question is whether the products are sufficiently similar and actually compete from the perspective of the average consumer.

Argumentation

• Transitional basis for the 2.1% rate
  • The 2.1% rate had existed on 1 January 1991. It could therefore potentially be maintained under Article 28(2)(a), subject to consistency with Community law and the social conditions inherited from the Second VAT Directive.
• Fiscal neutrality
  • The Court stated that fiscal neutrality precludes similar goods that compete with one another from receiving different VAT treatment.
  • However, reimbursable and non-reimbursable medicinal products did not occupy the same competitive position. Inclusion on the reimbursement list followed objective criteria under national law and Directive 89/105/EEC.
  • Reimbursement gave a medicinal product a decisive advantage for the final consumer. Consumers preferred reimbursable products because their cost was covered or partly covered by social security, not because of the difference between the 2.1% and 5.5% VAT rates.
  • The Commission had therefore not demonstrated that the two categories were similar competing products whose differential treatment distorted competition.
• Social grounds and consumer benefit
  • The Court also accepted that the special rate pursued a clearly defined social purpose. It reduced expenditure borne by the social security system and lowered healthcare costs for final consumers.
• The three requirements in Article 28(2)(a) were therefore satisfied. [eur-lex.europa.eu]

Source

• Judgment in Case C-481/98, Commission v France
• Sixth Council Directive 77/388/EEC
• Second Council Directive 67/228/EEC

Similar ECJ Cases

• C-216/97 Gregg: Confirmed that fiscal neutrality prevents economically comparable operators from being treated differently solely because of legal form.
• C-283/95 Fischer: Applied fiscal neutrality to competing lawful and unlawful gambling activities.
• C-267/99 Adam: Considered whether comparable professional services could receive different VAT rates without infringing fiscal neutrality.

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