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Tax, VAT & Duty implications on Transactions or Arrangements involving DLT Assets
On the 1st November 2018, Malta’s Commissioner for Revenue (‘CfR’) issued guidelines in relation to transactions or arrangements involving DLT Assets. What follows covers the tax, VAT and duty treatment with respect to such transactions or arrangements, excluding e-transactions in fiat currency.
The CFR categorises DLT assets as follows:
Characteristics: Coins are similar to any other means of payment, in that they serve as a medium of exchange and are in no way connected to the issuer.
Tax treatment is similar to that of fiat currency, i.e. profits or proceeds arising from the exchange or sale of coins (when held as trading stock), is treated for tax purposes in the same way as income. Gains of a capital nature derived from coins fall outside scope of capital gains tax.
VAT treatment: For VAT purposes, coins are to be treated as other currencies, with relevant exemptions also applicable.
- Digital Wallets: Fees required by digital wallet providers in relation to allowing users to hold and operate cryptocurrencies are exempt without credit (provided that, cryptocurrency qualifies as currency for VAT purposes). In any other case, service could be considered as taxable.
- Mining: Considering that there would be no direct link between the compensation received and the service rendered, mining falls outside the scope of VAT. However, should a miner provide other services, VAT could be triggered at the standard rate.
- Exchange platforms: VAT implications of exchange or trade on online platforms facilitating peer-to-peer trading or exchange of DLT Assets in return for commission/transaction fees, etc. are to be determined on a case by case basis.
- If the service constitutes an electronic facility provided in order to facilitate such trade/exchange, the service should, in principle, be taxable.
- Any services which go beyond the above provided by the platform in return for compensation and where the DLT assets being traded classify as ‘currency’ or ‘security’, may be exempt.
- An ICO is outside scope of VAT on the basis that at the point of the initial offering the service or good is not identified, nor is the compensation.
Duty treatment: Coins fall outside the scope of the DDTA.
Characteristics of financial tokens are similar to those of equities, debentures, units in collective investment schemes, or derivatives including financial instruments, in that they may grant rights to dividends, rewards based on performance, voting rights, ownership or rights secured by an asset as in asset-backed tokens.
- Returns derived from the holding of tokens, such as dividends, are treated as income.
- Determining the tax treatment applicable on transfers of financial tokens requires the distinction of capital vs trading, that is depending on the intention, referring to the badges of trade if needed. If the transaction is of a capital nature, article 5 would be applicable only if such token meets the definition of ‘security’.
- Proceeds from initial offerings are not treated as income and the issue of new tokens is not treated as a transfer for the purpose of capital gains tax.
VAT treatment: Raising finance by issuing a financial token does not constitute as a supply of goods or service in return for consideration and therefore, does not fall within the scope of VAT. On the other hand, services supplied on exchange platforms have the same implications of ‘Exchange platforms’ described above.
Unless the underlying good or service in exchange for the initial offering is identifiable, an ICO is outside scope of VAT.
Duty treatment: Where DLT assets have the same characteristics of ‘marketable securities’, transfers shall be subject to duty as prescribed in the applicable provisions of the DDTA.
Characteristics: Value and application of utility tokens is restricted to the acquisition of goods or services within the DLT platform, within a limited network of DLT platforms or in relation to which they are issued, but they have no connection with the equity of the issuer.
- Determining the tax treatment applicable on transfers of utility tokens requires the distinction of capital vs trading, i.e. depending on the intention, referring to the badges of trade if needed.
- An initial offering in the case of utility tokens binds the issuer to provide services/goods to the holder, and in this case, gains or profits realised from the provision of the service or the supply of the good are to be considered as income.
VAT treatment: where a token is exchanged for a good or service (which is known), such token is to be treated as a voucher.
- Single Purpose Voucher (SPV): if at the time of the issue of a voucher representing an underlying good or service, the place of supply as well as the VAT due are known, consideration in respect of such voucher would create a tax point and therefore trigger VAT in terms of the Fourth Schedule of the VAT Act.
- Multi-Purpose Voucher (MPV): MPV is one where the place of supply and the VAT due are unknown at the time of issuance. In this case, VAT is due at the time of redemption.
- Unless the underlying good or service in exchange for the initial offering is identifiable, an ICO is outside scope of VAT.
Duty treatment: On the basis that utility tokens have no connection with the equity of the issuer and that these are not considered as similar to securities, utility tokens fall outside the scope of DDTA.
Tokens may contain characteristics of both financial and utility tokens which are referred to ‘hybrids’ and these are to be treated depending on the context in which they are used.
- Value of DLT assets is determined by referring to the market value of the DLT asset in question.
- Obligation to keep proper records of transactions still applies which must be translated to the reporting currency in which the taxpayers present its financial statements.
- Treatment of payment applies in the same manner as payment in any other currency.
- For VAT purposes, the place of supply of Electronically Supplied Services to a non-taxable person, where the reverse charge mechanism does not apply, is where the customer is established.
Please be aware that the treatment of transactions in respect of VAT, tax and duty, concerning any type of DLT asset will not necessarily be determined by its categorisation, but will ultimately depend on the purpose for and context in which the transaction is made according to the applicable Act.
Furthermore, should you wish further clarification on any implications relating to DLT assets get in touch with ARQ Group