Flashback on ECJ Cases C-41/04 (Levob Verzekeringen and OV Bank) – Software is a supply of services if customization is predominal

On Oct 27, 2005, the ECJ issued its decision in the case C-41/04 ((Levob Verzekeringen and OV Bank)) related to Transfer of software recorded on a carrier – Subsequent customisation of the software to the purchaser’s specific requirements. This case deals with the classification of software as a supply of goods (carrier/CD) or a supply of services, this is also about composite supplies.

Article in the EU VAT Directive

Article 2(1), 5(1), 6(1) and 9(2)(e) of the Sixth Directive

Article 9

Supply of services

1. The place where a service is supplied shall be deemed to be the place where the supplier has established his business or has a fixed establishment from which the service is supplied or, in the absence of such a place of business or fixed establishment, the place where he has his permanent address or usually resides.

2. However: (a) the place of the supply of services connected with immovable property, including the services of estate agents and experts, and of services for preparing and coordinating construction works, such as the services of architects and of firms providing on-site supervision, shall be the place where the property is situated;

(e) the place where the following services are supplied when performed for customers established outside the Community or for taxable persons established in the Community but not in the same country as the supplier, shall be the place where the customer has established his business or has a fixed establishment to which the service is supplied or, in the absence of such a place, the place where he has his permanent address or usually resides: – transfers and assignments of copyrights, patents, licences, trade marks and similar rights,

– advertising services,

– services of consultants, engineers, consultancy bureaux, lawyers, accountants and other similar services, as well as data processing and the supplying of information,

– obligations to refrain from pursuing or exercising, in whole or in part, a business activity or a right referred to in this point (e),

– banking, financial and insurance transactions including reinsurance, with the exception of the hire of safes,

– the supply of staff,

– the services of agents who act in the name and for the account of another, when they procure for their principal the services referred to in this point (e).

Facts

Levob operated an insurance business in the Netherlands. Levob purchased from a US corporation (FDP) a licence to use software which FDP marketed to insurance companies in the US. The contract further provided that FDP would customise the basic software in order to enable Levob to use it in the management of the insurance contracts which it sold. That was essentially a question of transposing the programme into Dutch and modifying it as required by the fact that, in the Netherlands, agents were involved in such insurance contracts. In addition, FDP undertook to install the basic software and customise it on Levob’s computer system and to give five days’ training to Levob’s staff. The customisation of the basic software, its installation and the agreed training took place between 1997 and 1999. Levob did not state the amounts paid for the basic software in its VAT declarations, but it did ask the tax authorities to issue notices of assessment with regard to the amounts paid in respect of the customisation of the software, its installation and the training given by FDP. The tax authorities issued notices of assessment in respect of all the payments made by Levob under the contract on the basis that the service supplied by FDP consisted in a single supply relating to the customised software. Levob appealed against the findings that the supply of the basic software and its customisation constituted a single taxable transaction and that the transaction was a supply of services. According to Levob, the supply of the basic software constituted a supply of goods. The Hoge Raad der Nederlanden decided to stay the proceedings and to refer questions to the ECJ for a preliminary ruling

Source Croner-I

Questions

Reference has been made to the Court of Justice of the European Communities by order of the Hoge Raad der Nederlanden of 30 January 2004, received at the Court Registry on 2 February 2004, for a preliminary ruling in the case of Levob Verzekeringen B.V., OB Bank N.V., c.s, against Staatssecretaris van Fiananciën on the following questions:

1 (a) Are Article 2(1) and Article 5(1) of the Sixth Directive, in conjunction with Article 6(1) thereof, to be interpreted as meaning that the acquisition of software, such as that in the present case and on terms such as those at issue in this dispute – whereby separate payment is stipulated in respect of the standard software, recorded on a carrier, developed and put on the market by the supplier, on the one hand, and the subsequent customisation thereof to the meet the purchaser’s requirements, on the other – must be regarded as a single supply?

(b) If the answer to the above question is in the affirmative, are these provisions to be interpreted as meaning that this supply must be regarded as a service (of which the supply of the goods, namely the carriers, forms part)?

(c) If the answer to that question is in the affirmative, is Article 9 of the Sixth Directive (in the version in force until 6 May 2002) to be interpreted as meaning that this service is supplied at the place referred to in Article 9(1)?

(d) If the answer to the previous question is in the negative, which part of Article 9(2) of the Sixth Directive is applicable?

2 (a) If the answer to Question 1a is in the negative, are the provisions referred to therein to be interpreted as meaning that the provision of non-customised software on the carriers must be regarded as a supply of tangible property for which the agreed separate price constitutes the consideration for the purposes of Article 11A(1)(a) of the Sixth Directive?

(b) If the answer to this question is in the negative, is Article 9 of the Sixth Directive to be interpreted as meaning that the service is supplied at the place referred to in Article 9(1) or at one of the places referred to in Article 9(2)?

(c) Does the same apply to the service consisting of the customisation of software as applies to the provision of the standard software?

AG Opinion

(1) The acquisition of standard software on a data carrier and the subsequent customisation thereof to meet the customer’s requirements must be regarded as a single supply within the meaning of 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 where the subsidiary supplies are so closely linked that, in isolation, from the perspective of the average consumer, they do not have the necessary practical benefit for customers. In assessing this question, it is irrelevant whether separate prices have been agreed and separate invoices have been made out for the subsidiary supplies.

(2) A comprehensive supply that consists of the supply of standard software, the customisation thereof to meet the customer’s requirements, its installation and training services is to be regarded in its entirety as a supply of services within the meaning of Article 6(1) of the Sixth Directive where, having regard to all the circumstances, the service elements predominate. This may be the case, for example,

– where the customisation of the standard software is of crucial importance for its use by the acquirer,

– where customisation and installation are so expensive that they cannot be regarded as ancillary supplies and

– where the service elements account for the predominant part of the value of the comprehensive supply.

(3) A comprehensive supply that consists of the supply of standard software, the customisation thereof to meet the customer’s requirements, its installation and training services is to be regarded as data processing and the supplying of information within the meaning of Article 9(2)(e), third indent, of the Sixth Directive, with the result that the place where the recipient of the supplies is established must be regarded as the place of supply.

Decision

1. Article 2(1) of 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 must be interpreted as meaning that where two or more elements or acts supplied by a taxable person to a customer, being a typical consumer, are so closely linked that they form objectively, from an economic point of view, a whole transaction, which it would be artificial to split, all those elements or acts constitute a single supply for purposes of the application of VAT;

2. This is true of a transaction by which a taxable person supplies to a consumer standard software previously developed, put on the market and recorded on a carrier and subsequently customises that software to that purchaser’s specific requirements, even where separate prices are paid;

3. Article 6(1) of Sixth Directive 77/388 must be interpreted as meaning that a single supply such as that referred to in paragraph 2 of this operative part is to be classified as a ‘supply of services’ where it is apparent that the customisation in question is neither minor nor ancillary but, on the contrary, predominates; such is the case in particular where in the light of factors such as its extent, cost or duration the customisation is of decisive importance in enabling the purchaser to use the customised software;

4. Article 9(2)(e), third indent, of Sixth Directive 77/388 must be interpreted as meaning that it applies to a single supply of services such as that referred to in paragraph 3 of this operative part performed for a taxable person established in the Community but not in the same country as the supplier.

Summary

The ECJ concluded that the uniform basis of assessment within the Sixth Directive must be interpreted as meaning that ‘where two or more elements or acts supplied by a taxable person to a customer, being a typical consumer, are so closely linked that they form objectively, from an economic point of view, a whole transaction, which it would be artificial to split, all those elements or acts constitute a single supply for purposes of the application of VAT…this is true of a transaction by which a taxable person supplies to a consumer standard software previously developed, put on the market and recorded on a carrier and subsequently customises that software to that purchaser- specific requirements, even where separate prices are paid’.

The judgement went on to say that Article 6(1) of the Sixth Directive 77/388 must be interpreted as meaning that ‘a single supply is to be classified as a supply of services where it is apparent that the customisation in question is neither minor nor ancillary but, on the contrary, predominates; such is the case in particular where in the light of factors such as its extent, cost or duration the customisation is of decisive importance in enabling the purchaser to use the customised software’.

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