Inclusion of software royalties in the customs value of imported goods

7 June, 2022
Tax Messenger
On 28 March 2022 the Arbitration Court of Saint Petersburg and the Leningrad Oblast adopted a ruling on case No. А56−100 702/2021 involving a dispute over the legality of a customs authority’s decisions regarding the inclusion of software royalties in the customs value of imported goods.

The importer’s claims for the invalidation of the customs authority’s decisions requiring the inclusion of such payments in customs value were satisfied in full.
Facts of the case

A Russian importer ("the Importer") imported automatic counter sensors ("Goods") into the territory of the EAEU under a foreign trade contract with a seller from Germany ("the Seller"). The Goods in question contain firmware that makes them operational and enables them to fulfil all their technical functions.

At the same time, the Importer had licence agreements with the Seller under which it was authorised to reproduce, install and distribute software ("Software") in the territory of Russia. The Importer sells that Software to Russian end users under a sublicence agreement together with the imported Goods.
The Importer did not include royalties for the use of the Software in the customs value of imported Goods. Following an in-house customs inspection, the customs authority decided that the royalties must be included in the customs value of the Goods.

Disagreeing with the customs authority’s decisions, the Importer filed a claim with the arbitration court for the decisions to be invalidated. The arbitration court granted the Importer’s claims in full. The court’s position is set out in detail below.
The court’s position

Taking the Importer’s side, the arbitration court gave the following reasoning for its decision:

The royalties are not related to the imported Goods by reason of the following:
  • The licensed Software is not pre-installed in the imported Goods and does not have to be used with the imported Goods in order for them to function normally.
  • The licensed Software is not intended solely for use with the imported Goods but may be used with any other equipment purchased from other suppliers.
The payment of the royalties is not a condition of sale of the Goods for exportation to Russia, since obligations under the foreign trade contract and the licence agreements are not mutually dependent. Failure to pay the royalties would not enable the Seller/Licensor to terminate the foreign trade agreement. Nor does the Seller/Licensor have authority to exercise control over the Importer’s activities beyond quality control.

The court additionally observed that the fact that the Importer sold the Goods and the licensed Software together after importing them into Russia was not a sufficient reason to add payments for the use of the Software to the price actually paid or payable for the Goods.

The customs authorities are currently paying particular attention to the question of whether separately supplied software may be treated as integral to imported equipment. Increasingly, the customs authorities are not only evaluating the circumstances of the sale of goods for shipment to the EAEU but are also examining the arrangements through which the imported goods and software are subsequently sold.

This means that when hardware and software are sold by an entity that is both the seller of the goods and the rights owner of the software, it is important to determine whether or not it is possible for the importer and/or the end consumer to use the imported goods without using the licensed software.
The favourable outcome of the dispute hinged specifically on the fact that the imported goods were a self-contained product capable of carrying out the operational and technical functions for which it was intended.

However, since, at the time of writing, there have been no rulings from higher courts on the case concerned, it is too early to assert the establishment of a firm judicial position on this issue.
How we can help

  • Evaluating whether software royalties must be included in the customs value of imported goods.
  • Assessing the risk that the customs authorities will make additions to the customs value of goods under existing and planned licence agreements, including agreements on software use.
  • Recommending changes to licence agreements to minimise detected risks.
  • Developing approaches to the inclusion of royalties in the structure of customs value (including analysing the applicability of deferred determination of customs value).
  • Substantiating customs value (preparing responses to inquiries from customs authorities, preparing arguments, drafting documents), including the non-inclusion of software royalties in that value.
  • Preparing arguments (a defence position) regarding the non-inclusion of additional elements in the customs value of goods or for deductions from customs value.
  • Support during customs inspections on the matter of the inclusion of royalties in customs value.
  • Representing interests in the pre-litigation and litigation stages of appealing against decisions of customs authorities.
Read more

  • Inna Elisanova
    Global trade services, Tax & Law
  • Vladislava Gritskova
    Global trade services, Tax & Law
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