Supplies of computer software

The European Court of Justice (ECJ) has delivered its judgment in the case of Levob Verzekeringen BV, OV Bank NV v Staatssecretaris van Financiën (C41/04). This case concerns the VAT classification of the supply of a standard software program followed by customisation of that program to the customer's requirements and related installation and training services.

Levob (an insurance company in the Netherlands) purchased a computer program from FDP (a US software company). Levob paid FDP for a non-transferable licence to use the software and Levob employees took delivery of the data in the USA and imported it to the Netherlands. It was necessary to customise the software for use in the Netherlands, both to translate it into Dutch and to modify it to recognise the functions of different parties in the Dutch insurance market. The contract between FDP and Levob therefore also provided for FDP to supply these customisation services (cost around $900k), as well as related installation and training services (cost $7.5k). Separate payments were made by Levob for the computer program and the customisation and other services.

The ECJ addressed three questions as follows:

1. Is the provision of standard software and the subsequent customisation of the software by the supplier to the purchaser’s requirements to be regarded as two distinct supplies or as one single supply? The ECJ concluded that, in the facts described above, there is a single supply for VAT purposes.

2. Is that single supply to be classified as one of goods or services? The ECJ noted that the predominant element of the supply must be identified and that other factors must also be considered, such as the importance to the purchaser of the customisation of the standard software and the extent, duration and cost of the customisation.

The ECJ concluded that the national court was correct in reaching a decision that there was a single supply of services as the above criteria lead to the conclusion that, far from being minor or ancillary, the customisation predominated because of its decisive importance in enabling the purchaser to use the software customised to its specific requirements which it was purchasing.

3. How are the services to be classified in terms of the EC VAT legislation? The ECJ noted that the uncertainty faced by the national court was in deciding which of the words within the third indent of Article 9(2)(e) — ‘services of consultants, engineers, consultancy bureaux, lawyers, accountants and other similar services, as well as data processing and the supplying of information’ — is correctly applicable to the services in question. Both the Dutch Government and the European Commission agreed with the suggestion of the national court that the service should be seen as 'data processing and the supplying of information', but the ECJ took the view that the service should be seen as 'services carried out by engineers or by those which are similar to the activity of an engineer'.

Comment
The judgment of the ECJ provides useful clarification for those who provide standard software with a significant element of customisation required to meet the customer needs. The judgment also contains an interesting comment in reaching its conclusion that the supply of the standard software with subsequent customisation represents a single supply of services. The ECJ states that it would be artificial to take the view that the customer purchased pre-existing software which was of no use to that customer and then purchased customisation services which made the software useful to it. This comment reflects the current focus by the ECJ on attempts to artificially split a transaction so as to distort the functioning of the VAT system.