Is the recent decision by the German Federal Administrative Court an indication for Swiss-based pharma companies to revisit their EU buy/sell operating model?

Swiss principal companies have been operating in the EU, buying and selling medicinal products for many years. However, the recent decision by the German Federal Administrative Court (‘the German court’) could make this operating model rather difficult1 to maintain in practice. As per the Court’s decision, Swiss companies will no longer be allowed to use wholesale license issued by Switzerland to sell medicinal products in Germany. 

Simplified transaction overview of the case*:

ey-switzerland-blog-graph Medicinal

*Illustrative purpose only, may not reflect all the details of the transaction

A notable point is that goods remain in the EU while invoicing is performed by the Swiss principal company. According to the German court, such a construct is not allowed under the EU Directive 2001/83/EC, implemented in Germany. Accordingly, medicinal products produced and shipped within the EU can be obtained by an EU distributor only from another party who has wholesale authorization issued by an EU member state. Since it is not possible for a Swiss / non-EU company to receive an EU authorization, intra-EU sales routed via a Swiss company were not allowed in this case.

Relevance for Swiss principal operating models

Although this judgement by the German Court is focusing on a regulatory compliance matter and is based on specific facts and arguments, the concerned transaction model is a standard design for principal buy/sell operating models. The EU based tolling models with Swiss / Non-EU principal are also impacted by this judgement, as the same reasoning may be applied i.e. a Swiss/ Non-EU company is not allowed to sell the covered goods when produced and shipped with the EU.  The judgement exposes companies with such operating models to the risk of violation of German medicinal products regulation and, consequently, it impacts the historical transactional setup.

There are some immediate potential impacts that can be observed:

  • The goods need to be physically shipped to Switzerland and then exported back to the EU. This can create undue logistics burden on the supply chain process, increase costs and lead times.
  • The goods cannot be sold via the Swiss principal company. This means that the Swiss principal company needs to be compensated for its function and risk via another mechanism, e.g., value-based fee, royalty or license fees.
  • Other EU member states may adopt this judgement according to their own interpretation and implementation of the EU Directive, thereby exposing the European buy/sell operating model for Swiss Pharma companies to potential violation of the EU Directive.
  • Clearly, the decision does have a significant impact on businesses’ ability to transact, but, at the same time, it may also have significant effects on corporate income tax.

Immediate and short-term considerations for companies

The judgement applies for the named company based on the specific facts and arguments during the court proceedings. Therefore, the judgement has no immediate impact on Swiss / non-EU companies operating in Germany and the EU. However, it is possible that in future German authorities may proactively question centralized transactional models if a Swiss / non-EU principal company is involved and that other EU member states could adopt the position of the German court. Given this potential risk, we suggest the following proactive steps for companies with similar operating models:

  1. Quantify the risk, i.e., value and number of transactions with Swiss / non-EU company as buy/sell entity
  2. Review the line of arguments in the judgement and assess whether these are applicable for your operating model (e.g., can sales from a Swiss principal company be considered as sales prior to ‘placing on the market’, thereby keeping the EU compliance obligations with the EU-based distributors)
  3. Review alternative available routes, e.g., direct sales by local EU-based entities or sales via distribution entities into another EU member state which has not taken the same legal position as the German court
  4. Review alternative mechanisms, e.g., introduce a variable royalty / license fee if/where other options may not be feasible
  5. Review the tax, legal and business impact of this decision on the overall model

EY has experienced tax and legal professionals who can perform such a review and recommend appropriate course of action. Please connect with the contact persons for further information.

[1] Judgement dated February 25th, 2021 Federal Administrative Court (BVerwG 3C1/20)