Developments in case law regarding the inclusion of software royalties in the customs value of imported equipment

7 October 2022
Tax Messenger
On 15 September 2022 the Arbitration Court of the Krasnodar Region ("the Court") issued a ruling on case No. A32−7385/2022 in which it ruled as unlawful a customs authority’s decisions to require royalties for software products to be included in the customs value of imported goods.
You can read more about the case and the Court’s conclusions below.
Facts of the case

In 2019 the Company imported various kinds of computer equipment and components ("Goods") into the customs territory of the Eurasian Economic Union (EAEU) under a contract for the licensing of software (SW), the provision of services and the purchase of equipment ("Contract") with a foreign counterparty.

Under that contract the Company also received licences for software to be installed on its servers and services involving the preparation, installation and configuration of the software and training in the use of the software.

The software was used by the Company in conjunction with certain types of imported Goods that enable information to be input into and retrieved from the licensed system as well as with other equipment in the Company’s possession.

In 2021 the Company was subjected to a customs inspection involving the post-clearance examination of documents and/or information, as a result of which the customs authority concluded that the cost of the software licences should have been included in the customs value of the imported Goods.
The Court’s conclusion

Two conditions must be met in order for royalty payments to be included in the customs value of imported goods:

Condition 1. The royalty payments are related to the imported goods:
To determine whether or not Condition 1 was met, the Court ordered a computer forensic analysis, which produced the following findings:

  • The software is not related to the imported Goods but can be installed on any physical server
  • The software is not tied to specific brands or models of computers
  • The modification and integration of software into an existing system are standard procedures in the software lifecycle
Based on these findings, the Court decided that Condition 1 was not met owing to the fact that, contrary to the customs authority’s contentions, the Goods were not of a specialised nature, i.e., they were not developed specifically to run the software.

In this regard, the Court emphasised that what mattered in legal terms was not simply whether the Goods were needed for use with the licensed software, but whether the Goods were designed specifically to run that software.

The Court also concluded that the Goods imported by the Company were general-purpose goods, citing the written explanations given by the seller (and licensor) of the Goods and a letter from an independent certification body.

Condition 2. The royalty payments are a condition of sale of the imported goods for shipment to the customs territory of the EAEU:

In addressing the matter of whether or not Condition 2 was met, the Court observed that the customs authority’s inspection report only contained a general assertion that the payment of royalties was a condition of sale of the imported Goods but did not provide any documentary evidence to support that conclusion.

At the same time, the Court established that the Contract contained no provisions making the licence fee a condition of sale of the Goods and no provisions to the effect that the Contract would be terminated insofar as the supply of the Goods was concerned if the Company failed to pay royalties.

It was additionally observed that the Company had purchased identical and similar goods not only from the rights holder under the Contract but also from other suppliers.

Based on the above considerations, the Court ruled as unlawful the customs authority’s decisions to require goods declarations to be amended so as to include software royalties in the custom value of imported Goods.

The customs authorities are showing an increased interest in licensing arrangements involving the transfer of software rights by electronic delivery where this occurs alongside the importation of equipment on which or with which that software can be used.

At present, however, case law on this issue is far from settled. It is interesting, for example, to observe the development of the dispute in case No. A56−102 885/2021. In that case the trial court upheld the importer’s claims for the customs authority’s decisions to be invalidated insofar as they required royalties for the use of electronically delivered software to be included in the customs value of imported equipment, but the appellate court overturned the trial court’s ruling.

It should also be pointed out that the customs authorities are currently initiating inspections not only in relation to licensing arrangements involving the transfer of software, but also in relation to transactions involving the alienation of software rights (for example, the decision of the Arbitration Court of the Moscow Oblast of 20.07.2022 on case No. A33−33 576/2021).
How we can help

  • Analysing licensing and intra-group structures and assessing the need for royalties and other payments to be included in customs value
  • Preparing a legal position to defend the company’s approach in not including royalties and other payments (and amounts of VAT paid by the withholding agent) in the customs value of goods
  • Giving recommendations on changing/updating licensing structures to minimise customs risks
  • Providing legal support with the drawing up of licensing and other intra-group agreements based on proposed licensing and supply arrangements
  • Providing support during customs inspections (preparing replies to requests from the customs authorities, preparing a legal position, drafting additional documents, communicating with the customs authorities and arranging meetings)
  • Appealing against customs office decisions to higher customs authorities and in the courts
  • Providing practical support in making changes to goods declarations with regard to the inclusion of royalties in customs value

  • Wilhelmina Shavshina
    Global trade and Customs
  • Vladislava Gritskova
    Assistant Manager
    Global trade and Customs
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