State aid: reimbursement of discriminatory taxes - the Boiron ruling

On 7 September 2006, the European Court of Justice gave a ruling on whether a tax on direct sales of medicines, applicable to pharmaceutical companies but not wholesale distributors, could amount to unlawful state aid and whether this could be used as a basis for a claim for reimbursement.


28 September 2006

On 7 September 2006, the European Court of Justice gave a ruling on whether a tax on direct sales of medicines, applicable to pharmaceutical companies but not wholesale distributors, could amount to unlawful state aid and whether this could be used as a basis for a claim for reimbursement.


Boiron produced homeopathic medicines and distributed them in France exclusively to pharmacies, either by direct sales or through wholesale distributors.  French law imposed a tax contribution of 2.5% of pre-tax turnover on direct sales to pharmacies. The tax was not imposed on sales by wholesale distributors. The tax differential was, in part, designed to restore the balance of competition between pharmaceutical laboratories such as Boiron and wholesale distributors, given that they were subject to public service duties (to keep an adequate stock of medicines) that were not imposed on pharmaceutical laboratories.

Boiron paid the tax but brought an action seeking its reimbursement on the basis that the exemption from the tax for wholesale distributors amounted to unlawful state aid under Article 87 of the EC Treaty.  The French court sought a preliminary ruling on the point from the ECJ.

The Ruling

In many ways, the key part of the case and the ECJ's ruling concerned the liability of a member state (such as France in the present action), which has established an unlawful aid scheme in favour of one class of undertakings funded by tax contributions from another class, to reimburse those tax contributions.

However, confronting Boiron and its claim for recovery of tax contributions stood the obstacle of the ECJ's own previous case law.  That case law, culminating in the Air Liquide decision earlier this year, established the principle that, for a tax to be regarded as forming an integral part of an aid measure (and thus recoverable by the tax payer), it must be hypothecated to the aid measure under the relevant national rules, i.e., the revenue from the tax must be earmarked for the purposes of financing the aid.  In the absence of hypothecation, a taxpayer cannot rely on the argument that an exemption enjoyed by other businesses constitutes state aid in order to avoid payment of that tax or to obtain reimbursement.

Happily for Boiron, the ECJ took the view that the nature of the French tax measures at issue differed essentially from those covered by the Air Liquide principle.  According to the Court:-

"[The Air Liquide case law] concerns an exemption for certain operators from a tax of general application and in which it is alleged that that exemption itself amounted to an aid measure.  The case in the main proceedings here, by contrast, does not involve such a taxation scheme, but rather a charge for which only one of the two categories of competing operators, namely pharmaceutical laboratories, is liable.  In such a case of unequal liability for a charge, the supposed aid derives from the fact that another category of economic operators with which the category subject to the charge is in direct competition, in this case wholesale distributors, is not liable for that charge" (emphasis added).

Put another way, according to the Court, in this case "the measure alleged to constitute an aid is the tax on direct sales itself and not some exemption which is separable from that tax".

In such circumstances, the Court ruled that a firm such as Boiron was entitled to plead that the charge on direct sales is unlawful, for the purposes of applying for reimbursement, on the ground that it amounts to an aid measure.

The Court also ruled that the French authorities (and courts) had to take all appropriate steps (consistent with the fundamental principles of equivalence and effectiveness) to facilitate reimbursement to Boiron and others in a similar situation.


The ECJ appears to have taken the view that some limits now need to be placed on the scope of the Air Liquide case law.   Perhaps in taking this step, the Court has had an eye to the severe difficulties faced by the European Commission in pursuing state aid cases against the Member States.  By facilitating 'self-help' claims such as those of Boiron, the Court may have been seeking to assist the Commission in enforcing the Treaty rules in this area.

However, in removing the hypothecation criterion imposed by Air Liquide, does the Court not risk opening the flood-gates to reimbursement claims by any class of tax payers who can demonstrate they are in competition with any group of non-tax payers?

Well, there is something of a sting-in-the tail in the Court's ruling.  It states, in concluding on the possibility of raising reimbursement claims:-

"It should be added that, in any event, such reimbursement can be granted only if it is shown that those sums or, at the very least, the part of those sums for which reimbursement is claimed, amount to an overcompensation of wholesale distributors and thus, by this measure, confer an economic advantage on the latter, if, in addition, the other conditions referred to in Article 87(1) EC for a measure to be classed as State aid are also fulfilled".

In other words, it would appear that there is an aggregate 'cap' which has to be imposed on all potential reimbursement claims equal to the absolute level of aid enjoyed by the class enjoying the tax breaks in question.  By way of illustration, assume there is a tax of £100 per head imposed on 10 undertakings, but not on 5 of their competitors.  The tax payers collectively are 'down' by £1000, whilst the exempt group are only 'up' collectively by £500.  Thus, the maximum reimbursement claim which any of the tax payers can make is £50 each.

It will be interesting to see what use is made of the Boiron ruling in future and whether it will result in significantly higher levels of private claims than were possible under Air Liquide.