The impact of royalties on the customs value
5 August 2020 - On 9 July 2020, the Court of Justice of the European Union (CJEU) concluded in the case of Curtis Balkan (C‑76/19) that royalties should be taken into account for determining the customs value of semi-finished products used for manufacturing of licensed finished products for which royalties have been paid.
Curtis Balkan is a subsidiary of Curtis USA established in Bulgaria. The legal relationship between those two companies is arranged by the Service Management Agreement and the Patent Use Agreement. The Patent Use Agreement stipulates that Curtis Balkan pays royalties to Curtis USA for the use of know-how to produce licensed finished products. For the production itself, Curtis Balkan imports semi-finished products from third party manufacturers into the EU and integrates them in licensed finished products. Curtis USA controls the entire production chain, from the negotiation and centralized purchase of the components required for production, to the sale of the finished products. The components incorporated into the products are manufactured to specifications imposed by Curtis USA and are specially designed for these products. In addition, no other supplier can be chosen without the approval of Curtis USA.
During a control, the Bulgarian customs authorities determined that the imported goods were used by Curtis Balkan to manufacture goods for which they paid royalties to Curtis USA. These royalties were not included in the customs value declared for the imported goods. The Bulgarian customs authorities were of the opinion that the royalties should have been included in the customs value and revised the customs value of the imported goods by including the royalties. Curtis Balkan filed appeal and higher appeal. The Bulgarian Court overturned the verdict. The customs authorities submitted appeal at the Supreme Court which has referred the case to CJEU.
The referring Court asked whether the articles 157 (2), 158 (3) and 160 of Regulation No. 2454/93 are to be interpreted as whether a proportion of the royalties paid by Curtis Balkan to Curtis USA in consideration for the supply of know-how for the manufacture of licensed finished products in the EU must be added to the customs value of the imported semi-finished products which are incorporated in the licensed finished products.
The CJEU decided that article 32 (1) (c) of the Customs Code, read in conjunction with Articles 157 (2), 158 (3) and 160 of Regulation No. 2454/93, must be interpreted that a proportional share of royalties paid to a parent company in return for the supply of know-how for the manufacture of finished goods must be added to the customs value, if these imported semi-finished products will be included in the licensed finished products and are purchased by the first company from vendors separate from the parent company.
The following cumulative conditions must be met:
- The royalties or license fees are not included in the customs value.
- The royalties or license fees relate to the imported goods.
- The buyer is required to pay these royalties or license fees as a condition of sale for the goods being valued.
- The royalties can be appropriately allocated on the basis of objective and measurable data.
In this case, the first condition is satisfied because the royalties paid by Curtis Balkan to Curtis USA are not included in the customs value of the imported products. It is for the Bulgarian Court to determine if the other conditions are fulfilled.
Impact to your business
Royalties are mostly a topic of discussion, especially in the view of the changes made in the Union Customs Code. When royalty payments are included in your supply chain, it should be determined if these royalty payments should be included in the customs value of the imported products under the Union Customs Code.
Want to know more?
Do you have any questions regarding how to determine the customs value or the impact of royalties on the customs value? Please contact Eline Polak by e-mail or telephone: +31 (0)88 277 23 25 or Ellen van Heugten by e-mail or by telephone: +31 (0)88 277 12 45. They will be happy to help you.