The payment of customs duties on the value of EU-made software incorporated into imported devices

Background: adding software to the transaction value

Upon importation of goods into the EU, customs duties and a value added tax (VAT) are usually due. In the vast majority of cases, the amount of these duties depends on the value of the imported goods at the border. The Union Customs Code, which lays down the harmonised EU customs rules, says that the primary basis for the determination of that customs value is the transaction value: this is the price actually paid or payable for the goods when sold for export to the Union. In cases where there is no transaction value (for example where goods are merely transferred to the Union), the Union Customs Code sets out a number of alternative methods the importer must use for the determination of the customs value.

If the transaction value applies, the importer must adjust the price paid or payable where necessary. This includes, for example, adding the cost of transport and insurance of the imported goods, up to the place where the goods are brought into the customs territory of the Union. The Union Customs Code sets out the elements that should and should not be included in that transaction value.¹ As the legislation does not explicitly cover software, uncertainty remains as to what to do with the value of software for adjusting the customs value. The situation is especially complex when the buyer provides software to the seller free of charge, to be used in relation to the imported goods.

Software as an intangible assist

Where certain goods and services are supplied by the buyer free of charge (or at reduced cost) for use in connection with the production and sale into the EU of the imported goods, the value of those goods and services should be added to the price actually paid or payable if not yet included in the transaction value. These are so-called ‘assists’.

The European Court of Justice ruled already at the beginning of the nineties that software is intangible property which, if incorporated into an item or good, could be regarded as an integral part of the transaction value.² Later, the Court confirmed that software could qualify as a dutiable intangible assist.³

There is a consensus that software created outside of the Union could be an element of the transaction value of the imported goods. It was also clear that the value of software does not have to be added to the transaction value, if it is described as “engineering, development, artwork, design work, and plans and sketches” and if the conditions in the Union Customs Code are met: this kind of assist is only dutiable if it is created outside of the Union and if it is necessary for the production of the imported goods.⁴ However, what happens if software is created in the Union and if it is not necessary for the production of the imported goods, but is used in relation to the imported goods?

The BMW case

BMW sources vehicle control units from various third-country manufacturers. These units control the electrical systems of a vehicle. BMW makes standard software freely available to its third-country manufacturers, for incorporation in the control units. BMW developed and owns this software in the EU. While not necessary for the actual manufacturing of the unit, the software must be loaded onto the device for it to function. The installation of the software in the control unit by the manufacturer prior to shipment to the EU allows carrying out a functionality test outside of the EU. This test is a contractual obligation for the supplier, forms part of the quality assurance process, and serves to secure warranty claims. Upon importation in the EU, BMW does not include the development costs of that software in the customs value. As a result, BMW does not pay any import duty on the economic value of that software. German customs did not agree with this approach, and considered that the value of the software had to be added to the transaction value of the imported units.

In its judgement, the Court concludes that article 71(1)(b) of the Union Customs Code allows for the economic value of software made available free of charge by the buyer to the seller to be added to the transaction value of imported goods, even if this software is designed in the Union. To come to this conclusion, the Court relies primarily on the statements of the Customs Code Committee in the EU Customs Valuation Compendium.⁵ Conclusion no. 26 in that compendium makes a distinction between intangible components which are not strictly necessary for the production of the goods but a part of the end product (article 71(1)(b)(i) UCC) and which are dutiable, and intellectual assists which are necessary for the production process (article 71(1)(b)(iv) UCC) and which are not dutiable if developed in the EU.

If the software had been necessary for the production of the goods, it would have been a non-dutiable intellectual assist. In the case at hand, however, the Court considered that the software was not necessary for the manufacturing of the goods but was instead an intangible component integrated into the end product.

Conclusion

The treatment of software for customs valuation purposes is not straightforward. The BMW case shows that not only the place of production, but also the purpose of the software and the economic value added to the imported product are essential to determine whether software qualifies as a dutiable assist upon importation. Software designed in the EU is not generally excluded from the customs value. Manufacturers and importers should consider the customs duty impact of software in setting up their processes and contractual arrangements. To improve certainty on their customs valuation position, companies may request that the authorities provide a binding ruling. Our Brussels-based customs lawyers, with the support of our Greenlane network of customs and trade lawyers, are readily available to assist anywhere in the EU.

1. Article 71 of the Union Customs Code.
2. ECJ 18 April 1991, Brown Boveri, C-79/89, EU:C:1991:153, par. 21.
3. ECJ 16 November 2006, Compaq Computer International Corporation, C-306/04, EU:C:2006:716, par. 29.
4. Article 71(1)(b)(iv) of the Union Customs Code.
5. European Commission, “Compendium of Customs Valuation Texts”, edition 2018.

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