2018 Tax Plan: refinement definition medicine for VAT purposes
2018 Tax Plan - Budget Day (Prinsjesdag)
In the 2018 Tax Plan the Dutch government included a proposal for a refinement of the definition of medicine for the application of the reduced VAT rate as of 1 January 2018.
26 September 2017
The direct reason for the proposal was the judgment of the Supreme Court of 11 November 2016 that sunscreen lotions containing UVA and UVB filters and toothpaste containing fluoride qualify as medicines in the VAT definition of the word and are therefore subject to the reduced VAT rate of 6%.
As reported in our previous alert, the Ministry of Finance organised an Internet consultation on the stricter definition of medicines for the application of the reduced VAT between 17 July and 14 August 2017. However, the 2018 Tax Plan includes the proposal for a refinement of the definition of medicine without any changes.
The broad interpretation by the Supreme Court of the term medicine also creates opportunities for other products to be subject to the 6% VAT rate. The purpose of the proposal is to put an end to this broad interpretation.
By refining the VAT legislation, as of January 1, 2018 the reduced VAT rate of 6% will only be applicable to products for which a marketing authorisation has been issued as stipulated in the Dutch Medicines Act (Geneesmiddelenwet) or which are specifically excluded thereof. As of January 1, 2018 products which are currently subject to the reduced VAT rate of 6% due to their presentation, but which from the perspective of the Dutch Medicines Act and the European regulations for cosmetics, medicinal products and medical devices are evidently not allowed to be introduced into circulation as medicines, will no longer be subject to this reduced VAT rate. According to the Ministry of Finance the large majority of the products that currently qualify as medicines for VAT purposes will remain subject to the reduced VAT rate of 6%.
Impact on the Dutch practice
The proposal aims to achieve clarification, legal certainty and unambiguous VAT treatment of products qualifying as medicine in relation to the current situation. By linking products to the marketing authorisation as stipulated in the Dutch Medicines Act, or the explicit exclusion thereof, cosmetic, cleansing and care products such as sunscreen lotions and toothpastes containing fluoride and other pharmaceuticals for which an authorization as medical device has been issued, will no longer qualify as a medicine for VAT purposes.
Examples of these products are certain (baby) creams, mouth wash, insect spray and anti-dandruff shampoo, certain products against haemorrhoids, acne, bladder inflammation, heartburn, gastrointestinal cramps, diarrhoea, eczema, cough, head lice, lime, sore throat, scars, fungal infections, colds, blocked nose, warts and kidney dialysis concentrates. As of January 1, 2018 these products will possibly no longer be subject to the reduced VAT rate.
Since it involves a proposal for a change of legislation, the wording of the proposal will be subject to change during the parliamentary debate. It is therefore not yet clear what the final version of the proposal will be like.
Please note that (i) the Supreme Court considers that the term "medicine for VAT purposes" should be interpreted in accordance with the definition of the term "medicine" in the Medicinal Products Directive, including a broad explanation of the presentation criterion on the basis of European case law and (ii) an earlier attempt to amend the law has not been successful.
Parties selling medicines and like products should monitor these developments, in order to process possible changes in their administration in a timely manner.
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