Cutting edge tax implications for medical devices suppliers in Europe

Medical devices suppliers conducting agreements for allowing hospitals to use free of charge their equipment might face both VAT and corporate tax adverse implications.

Medical devices suppliers implement various business models to meet market conditions and clients’ needs. Usually, the medical devices suppliers:

• conclude sale – purchase agreements with their clients (generally hospitals) for both medical devices and the consumables necessary to run those devices or,
• conclude an agreement for allowing the hospitals the usage free of charge of the medical devices stimulating thus the sale of consumables necessary for running the devices (e.g. filers, bloodline systems, disinfectants, etc.) towards the hospitals.

While the first business model above might not raise any particular issues, the second one has various tax implications which were assessed for businesses operating in Romania but might affect their tax position also in other counties.

The business rationale for concluding agreements for allowing the hospitals the usage free of charge of the medical devices has the following prerequisites:

• hospitals do not always have available the necessary budgets for purchasing this equipment,
• the medical device suppliers will not be able to perform any economic transaction (neither sale of equipment nor sale of consumables) if there would be no demand (if the hospitals will not be able to make the purchases),
• patients will not benefit from the latest technologies if the hospitals will not have them available,
• allowing the hospitals to use free of charge the medical devices will potentially trigger an increase of sales in the consumables, generating therefore taxable operations and increase in revenues.

How it might affect the supplier's tax implications

In the specific case of medical devices suppliers, VAT and the expenses with the depreciation of the medical devices might become a cost if there is no link between the agreements for allowing the hospitals the usage free of charge of the medical devices and the taxable supplies (e.g. sales of consumables necessary for running the devices) or that link is not sufficiently documented.  

In Romania, this topic has been on the loop of the tax authorities for quite a while now. Various tax audits have been carried out by the Romanian tax authorities ending up with imposing additional tax liabilities and late payment interest and penalties to medical devices providers, although based on non-binding rulings issued by the legislator this topic shouldn’t have raised so many issues.

Although it started as a Romanian tax topic, this could raise issues in other EU countries as well.