France: How the Reform of the Tax Applicable to Pharmaceutical Product Turnover Will Affect Entities in this Field

Amendments introduced by the law of 13 August 2004 on health insurance¹ (the "Law") with respect to the tax applied on pharmaceutical product turnover ("Pharmaceutical Tax") will affect entities carrying out a wholesale activity of pharmaceutical products (including advertising, documenting, testing and controlling as well as warehousing related to pharmaceutical products).

The purpose of this note is to provide a preliminary outline of the new applicable rules which may need to be updated once the decree related to the Law has been published, which is expected to occur by the end of the year.

Originally², Pharmaceutical Tax was:

1. only payable by entities liable for annual tax on medicines defined in Article L.5121-17 of the State Healthcare Code, meaning entities holding a Marketing Authorisation ("MA")
2. assessed on the turnover, excluding VAT, made on French territory (mainland France and its overseas departments) for medicines which have a MA and are included on the list of medicines reimbursed on application of Article L.162-17 of the State Healthcare code and on the list mentioned in Article L.5123-2 of the same code, but not including non-reimbursable generic medicines
3. equal to 0.525% of the turnover defined above.

The reform of the Pharmaceutical Tax affects both the definition of liable entities and the calculation of the Pharmaceutical Tax.

Entities liable for Pharmaceutical Tax are no longer the same as those liable for annual tax on medicines, meaning those holding a MA.

Pharmaceutical Tax is now payable by any entity carrying out a wholesale activity in France of pharmaceutical products that are either reimbursed by the French Health Insurance Department or included on the list of medicines approved for public use, whether they hold a MA or not.

The rate of Pharmaceutical Tax has been increased from 0.525% to 0.6% of the taxable turnover.

In the absence of any amendment in the Law, the taxable turnover remains defined as the turnover, excluding VAT, made on French territory (mainland France and its overseas departments) with respect to medicines which have a MA and are included on the list of medicines reimbursed by application of Article L.162-17 of the State Healthcare Code and on the list mentioned in Article L.5123-2 of the same code. In particular, non-reimbursable generic medicines are therefore still exempt from Pharmaceutical Tax.

The following changes to the previous position should be noted:

1. Being payable only by entities liable for annual tax on medicines, the original Pharmaceutical Tax was not applicable to orphan medicines which are expressly exempt from annual tax on medicines. As persons liable for Pharmaceutical Tax are no longer defined as those liable for annual tax on medicines, the turnover resulting from the sale of orphan medicines should, based on the Law, be subject to the reformed Pharmaceutical Tax.
2. Reductions granted to clients are allowed to be deducted from the amount of taxable turnover.

Pharmaceutical Tax still has to be paid in two parts:

• a provisional down payment on 15 April of each year of the Pharmaceutical Tax calculated on the basis of 95% of the turnover made during the previous calendar year
• the balance on 15 April of the following year.

Therefore, liable companies will have to pay a provisional down payment calculated on the basis of 95% of their turnover made in 2004 on 15 April 2005 at the latest, and then the balance will be due on the 15 April 2006.

As in the past, Pharmaceutical Tax does not constitute a deductible expense for the determination of income liable for Corporate Income Tax.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.