VAT Treatment of Computer Software

C-41/04 Levob Verzekeringen BV, OB Bank NV v Staatssecretaris van Financien

The European Court released the opinion of Advocate General Kokott on 12 May 2005 in this Dutch referral on the VAT treatment of the acquisition of standard software with subsequent customisation to the purchaser's requirements. This is an interesting case in that it addresses many of the issues which have long caused problems of interpretation in relation to the cross-border supply of computer software.

Levob is a Dutch insurance company which, in 1997, purchased from a US supplier computer software which the supplier had sold to US insurance companies. The supplier granted a licence in its standard software program for $713,000 and handed over the carrier material (CD-ROMs or DVDs) to Levob staff in the US for those staff to take the carrier material to the Netherlands. In order that Levob could use the software in the Netherlands, it was necessary to customise the standard software for the Dutch market and a separate charge, at a value between $790,000 and $970,000, was made by the US supplier to customise the standard software to enable Levob to test it fully prior to acceptance. A further separate charge was also made by the US supplier for installation of the software on the Levob computer system and for training of the Levob staff.

A number of questions arose from these facts, including goods v services, single v multiple supply, import valuation and the classification of services under Article 9.

The AG first considered the treatment of standard software programmes in isolation, including a suggestion that all software in the commercial environment should by its nature be regarded as a right to use and hence be classified as a supply of services. The AG concluded that the supply of the standard software programme on a carrier programme (ie not delivered online) was a supply of goods under Article 5(1) of the Sixth Directive.

The AG then considered the treatment of customised software in isolation. The AG concluded that the supply of customised software is a supply of services under Article 6(1) of the Sixth Directive. (The AG did however suggest that, in a scenario where a programmer develops a programme at his own premises to meet the specific requirements of a single customer and delivers that programme to the customer on a carrier, such that the customer only has to install it, this could well be seen as a supply of goods).

The AG then considered if, in the circumstances of this case, the supply of the standard software followed by its customisation to the customer's requirements should be regarded as a single supply or two separate supplies. The AG first notes that neither the agreement of separate prices for the two aspects nor the drawing up of separate invoices for the two aspects is determinative in any way of the single v multiple supply questions. The AG, very much influenced by the Card Protection Plan approach, concludes that the key is to look at the overall characteristics of the supply from the customer's viewpoint and ask if the supplies are so closely linked to each other and interdependent upon each other that one would have no practical use to the customer without the other. The AG considers that, in the Levob case, this test is satisfied as evidenced by the fact that the customer was to test the programme fully after customisation and before acceptance, ie the standard software would be of no value to the customer without the customisation and vice versa. The AG concludes that the totality of the supply to Levob was a single supply of services. The AG suggests three tests which the national courts might apply (see below)

The AG finally considers the place of supply, ie whether that single supply of services falls within any heading of Article 9.2 or, if not, falls back to the 'normal' rule of Article 9.1. The AG rejects an argument that the supply falls under the first indent of Article 9.2(e) - transfer ... of licences .... and similar rights - on the grounds that any element of the transfer of a right is only a very minor part of an overall supply of customisation, installation and training services. The AG concludes that the supply falls under the third indent of Article 9.2(e) as 'data processing and the supplying of information'. The AG justifies this conclusion by observing that the words 'data processing' were put into the Sixth Directive in 1977 when software supplies, such as those being considered here, did not exist and that one must therefore look to interpret the intention of the legislation in a present-day context, rather than interpreting those words too strictly. The AG also concludes that Article 9.2(e) applies to the totality of the services including the installation services and the training services.

The conclusions of the opinion read :

Conclusion

110. In the light of the above, I propose that the questions from the Hooge Raad should be answered as follows:

1. The supply of standard software on a carrier and the subsequent customisation of it for the needs of the customer must in the sense of the Sixth Council Directive 77/388/EEC of 17 May 1977 on the harmonisation of the laws of the Member States relating to turnover taxes – Common system of value added tax: uniform basis of assessment, be regarded as a single supply of services, when the different parts of the supply are so closely bound together that from the point of view of the average consumer they do not have the necessary practical use for the customer on their own. It is not decisive when answering this question whether separate prices were agreed for the various parts, nor whether separate invoices were drawn up.

2. A single supply of services consisting of the supply of the standard software, the customisation of it to the customer’s requirements, installation and training, must be regarded in its totality as a service the sense of Article 6.1 of the Sixth Directive when, taking all the circumstances into account, the service aspects predominate. This can for example be the case

- when the customisation of the standard software is of decisive importance for its use by the acquirer:

- when the customisation and installation are so expensive that they cannot be regarded as ancillary services, and

- when the service aspects represent the greatest part of the value of the supply.

3. A single supply of services consisting of the supply of the standard software, the customisation of it to the customer’s requirements, installation and training, must be regarded as data processing and the supplying of information in the sense of Article 9.2(e), third indent, of the Sixth Directive (77/388) so that the place of supply is where the customer has established his business.