Executive summary

On 2 May 2025, the German Federal Fiscal Court (BFH) published a ruling (dated 11 December 2024, I R 41/21) addressing the tax consequences for German distribution entities of foreign pharmaceutical multinational groups with respect to so-called parallel imports of (original) pharmaceutical products in Germany.

Reversing the lower fiscal court, which had denied the possibility of an income adjustment, the BFH confirmed that an income adjustment (constructive dividend) could apply in such cases. The marketing activities performed by the German pharmaceutical distribution entity increase the sales of parallel imports in Germany and, therefore, increase the profit of the foreign parent entity. This means the foreign parent entity, as shareholder, benefits by saving on marketing expenses if the German pharmaceutical distribution entity is not appropriately remunerated for the marketing activities of parallel imports. Accordingly, this can result in an income adjustment (constructive dividend) for the German pharmaceutical distribution entity, the BFH concluded.

However, the BFH could not make a final assessment because the legal examination by the lower fiscal court was insufficient. Therefore, the BFH remanded to the lower fiscal court, which must now reevaluate the case based on the guidance developed in the BFH's opinion and address how to determine an income adjustment amount for the case at hand. It remains to be seen if, and to what extent, the lower fiscal court will consider the so-called "synthetic approach" in this regard. The synthetic approach is frequently applied to determine transfer prices for German pharmaceutical distribution entities of foreign groups. Applying this concept, all marketing expenses of the German pharmaceutical distribution entity, including mark-up, are already subject to an arm's-length remuneration, which would essentially not leave any room for an income-adjustment amount.

Detailed discussion

Background

The BFH ruling addresses the interaction between marketing activities performed by an affiliated German distribution entity of a foreign pharmaceutical multinational group and so-called parallel imports. Parallel imports originate due to price differences of pharmaceuticals in different European countries and occur outside the group sphere, meaning that the parallel importer is not an affiliate of the pharmaceutical multinational group. The parallel importer purchases original pharmaceuticals from wholesalers in European Union (EU) Member States with a relatively low price level for resale in another Member State (e.g., Germany) with a relatively high price level. Thus, parallel importers act as competitors of the pharmaceutical group's respective national distribution entities. The German pharmaceutical sector imposes a unique requirement, legally obliging German pharmacies to obtain a certain proportion of original pharmaceuticals from parallel importers if they are significantly cheaper (Sec. 129, para. 1, sentence 1, no. 2 Social Code Book V). This means that the respective German pharmacy ultimately decides whether a parallel-imported original pharmaceutical product or an original pharmaceutical product obtained through the German distribution entity is sold to a patient.

In practice, a dispute ensues between taxpayers and German tax authorities as to whether the German pharmaceutical distribution entity is entitled to an additional remuneration for parallel imports. According to German tax authorities, the marketing activities performed by the German distribution entity create an economic benefit for the parallel importers and, consequently, indirectly benefit the foreign parent entity of the pharmaceutical multinational group by increasing the overall group revenues/profits through the sale of original pharmaceutical products. Thus, the German pharmaceutical entity must be appropriately compensated for providing this benefit in the view of German tax authorities; otherwise, an income adjustment (constructive dividend) will be required.

German Federal Fiscal Court (BFH) ruling

In contrast to a prior ruling of the lower fiscal court in Nuremberg (ruling dated 20 July 2021, 1 K 1388/19) that denied an income adjustment in principle, the BFH confirms that an income adjustment in principle (constructive dividend) could be required in such a case.

According to the BFH, an income adjustment (constructive dividend) could be triggered from the shareholder's advantage on expense savings (here, the foreign parent entity of the German pharmaceutical distribution entity) because the company bears the expenses instead (here, marketing expenses resulting from activities performed by the German pharmaceutical distribution entity), if these expense savings are caused by the corporate relationship of the parties by waiving a reimbursement or compensation claim. The BFH confirms that the foreign parent entity realizes these expense savings in the case at issue because the German pharmaceutical distribution entity did not make a reimbursement claim.

The BFH also rejected the lower fiscal court's conclusion that an income adjustment (constructive dividend) in principle does not apply because the parallel imports are not in the actual interest of the foreign parent entity. According to the BFH, the German distribution entity performs its marketing activities in the interest of the entire group, which economically benefits from the parallel imports. It is irrelevant that the group profit would be overall higher if the original pharmaceutical products were distributed in the German market solely through the German pharmaceutical distribution entity, rather than partly through the parallel importers, the BFH concluded.

The BFH also rejected the lower fiscal court's conclusion that the advantage of increased product sales from the parallel imports resulting from the marketing activities performed by the domestic pharmaceutical distribution entity is not to be remunerated. According to the BFH, the argument that the German distribution entity had no "leverage" vis-à-vis the foreign parent entity to demand a remuneration and that a third party would not have had a promising negotiating position is not adequately substantiated. In particular, the fact that the product sales from parallel imports are included in the compensation of the German distribution entity's sales force indicates that such costs would be charged out in an arm's-length situation.

Therefore, on remand, the lower fiscal court must (1) first determine whether an income adjustment (constructive dividend) in principle applies for the case at hand and (2) if the answer to the first question is yes, address how the income adjustment amount should be determined. According to the BFH, the (pro rata) compensation that the German distribution entity's sales force received for the product sales from the parallel imports could determine the minimum value of the income adjustment amount. An appropriate markup on this minimum value would have to be applied, which could be based on the ratio of the product sales from parallel imports in relation to the group's total sales in Germany.

Implications

Foreign pharmaceutical multinational groups with German distribution entities should closely monitor the ongoing court proceedings. Particularly relevant for these companies will be whether, and to what extent, the lower fiscal court uses the "synthetic approach" — frequently applied to determine transfer prices for pharmaceutical distribution entities — to address how the income adjustment amount should be determined. Therefore, it remains to be seen whether the remuneration within the framework of the synthetic approach is sufficient for the lower fiscal court, and thus no additional remuneration — as German tax authorities had concluded — is required. As a result, the income adjustment amount could potentially be close to zero.