On the 1st of November 2018 the Office of the Commissioner published three Guidelines on the Tax and VAT treatment of Distributed Ledger Technologies.
According to the Guidelines the DLT assets are defined and categorised as follow:
1. Coins - DLT assets designed to be used as a means of payment or medium of exchange, or function as a store of value without the characteristics of a security.
2. Financial Tokens - DLT assets granting rights to dividends similar to equity shares, or interest payments similar to bonds, or payments linked with the performance of a specific asset of a company similar to derivatives.
3. Utility tokens - Their value is restricted solely to the acquisition of goods and services within the DLT platform of the issuing company, or within a limited network of DLT platforms.
Despite the above categorisation of DLT assets, tokens and coins may be of a hybrid nature having components of two or more of the classes identified above. The tax and vat treatment of a DLT assets will not necessarily be determined by its categorisation, but will depend on the purposes for and context in which it is used.
Income tax treatment of DLT assets
The general approach to the tax treatment of DLT assets follows the rules and principles applicable in terms of the Income Tax Act and the Duty on Documents and Transfers Act. The value of the DLT assets must be determined by using the market value composed by using the rate established by the Maltese authority, or, the average price on reputable exchanges.
The value expressed in a cryptocurrency will need to be presented in the reporting currency in which DLT assets providers present their financial statements.
Payments made or received in a cryptocurrency should be treated in the same manner as payments in any other currency for income tax purposes. When a payment is made or received in a financial or a utility token, it should be treated like any other payment in kind.
Transactions involving coins:
Transactions involving coins are to be treated for tax purposes in the same way as the transactions involving fiat currency. Proceeds from the disposal of coins held for trading purposes will be deemed to be a trading income, the same treatment applies to gains or profits from mining of cryptocurrency. However, capital gains derived from the disposal of coins held as a long term investment will fall outside the scope of income tax.
Return on financial tokens
Income derived by investors by way of dividends, interest, premiums etc., in a cryptocurrency or in another currency, or in kind, will be treated as ordinary income in terms of the provisions of Article 4 of the ITA.
Transfers of financial and utility tokens
The tax treatment of proceeds from the disposal of a financial or utility token will depend on whether it is a transaction of a trading or a capital nature. Profits from the disposal of tokens, acquired with the intention of resale at a profit, will be treated as trading profits. However, in order to distinguish whether a transaction is of a trading or capital nature it might be necessary to use the badges of trade tests.
If the transfer of financial tokens is not considered as a trading transaction, one must distinguish whether the tokens meet the definition of “securities” and whether they participate in any way in the profits of the company. If the financial tokens qualify as “securities” they will subject to tax as prescribed by the ITA. On the other hand, the transfer of tokens that do not fall within the definition of “securities”, such as transfers of utility tokens, will fall outside the scope of the tax on capital gains.
Treatment of Initial Offerings
An initial coin offering is a crowdfunding mechanism to raise funds for the development of future products and services which will be offered at a later stage by the issuing company. The proceeds of an ICO will not be treated as income and the issue of new tokens will not be treated as a transfer for the purposes of taxation of capital gains.
Any future use of the issued utility tokens to serve as a payment and access to products and services developed and offered by the company will be deemed to represent gains or profits subject to tax in terms of the ITA.
Duty on Documents and Transfers
In accordance with the DDTA, transfers of DLT assets with characteristics of ‘marketable securities’ will be subject to duty. Coins and utility tokens will fall outside the scope of the DDTA.
VAT treatment of DLT assets
The general approach to VAT treatment of DLT assets follows the rules and principles applicable in terms of the VAT Act, Chapter 406 of the Laws of Malta, the EU Directive (2006/112/EC) and the relevant regulations, as well as any relevant case law of the CJEU.
The first step to be taken in order to determine whether a transaction involving DLT assets falls within the scope of Maltese VAT, is to determine the place of supply of the goods and services. If the place of supply is not Malta the rules of the other country will apply.
Where transactions involving DLT assets are considered to be supplies of electronically supplied services, the place of supply of services provided to non-taxable individuals established in other MS is considered to be the place where the customer is established and where the reverse charge mechanism is not applicable. In such cases the supplier may opt to register and account for VAT under the MOSS System in terms of Part Eight of the 14th Schedule to the VAT Act.
Treatment of coins
Coins which are used as a means of payment must be treated like traditional currency for VAT purposes in terms of Hedqvist. Accordingly, the exemptions provided for transactions in currency will apply to “transactions, including negotiation” in cryptocurrencies where these serve as a means of payment. The exchange of cryptocurrencies for other cryptocurrencies or for fiat money will be covered by the said exemptions.
The payment of fees required by digital wallet providers for allowing users to hold and operate a cryptocurrency will be exempt without credit according to item 3(4), Part Two, 5th Schedule to the VAT Act. However, services which do not constitute transactions concerning currency and which cannot be regarded as transactions concerning payments or transfers, or transactions in securities, will be subject to VAT accordingly.
For VAT purposes a chargeable event arises where a supply of services is made for a consideration by a taxable person acting as such. Supplies of services can be subject to VAT, only if a direct link exists between the services supplied and the consideration received by the taxable person, and where, there is a reciprocal performance between the supplier and the recipient of the services.
Mining normally does not have a particular recipient and therefore falls outside the scope of VAT. However, should miners receive payment for other services, such services will be considered as taxable for VAT purposes. If the services are deemed to take place in Malta Maltese standard VAT will apply.
The provision of a trading/exchange facility in consideration for the payment of a transaction fee or commission will be deemed to be a supply of services for VAT purposes. The VAT treatment will depend on the nature of the service supplied:
(a) The provision of an electronic facility allowing to trade/exchange, will be deemed to be a technological services subject to VAT.
(b) However, if the DLT Assets traded classify as “currency” or “securities” for VAT purposes and where the platform’s services go beyond the mere provision of a trading facility, such services may fall within the exemption applicable to transactions concerning currency, transactions in securities and intermediation/ negotiation in connection with transactions in currency and securities.
Treatment of tokens
Financial tokens grant the rights to dividends, interest payments or other rights. If a financial token is issued to raise capital, the issue will not be subject to VAT, because the raising of finance does not constitute a taxable supply of services and falls outside scope of Maltese VAT. Services supplied by exchange platforms to buyers and sellers will have the same treatment applicable to coins.
Token issued against a payment which carries an obligation to be accepted as a payment for goods or services, and the goods or services to be supplied or the identity of the supplier is known, will have the characteristics of a voucher and will be treated for VAT purposes accordingly.
Single-purpose Voucher (SPV)
In the case of a single-purpose voucher the place of supply and the VAT due are known at the time of the voucher’s issue. As such the payment for the voucher will be deemed to be a payment for the good or service and will be immediately subject to Maltese VAT.
Multi-purpose Voucher (MPV)
In the case of a multi-purpose voucher the place of supply and the VAT due for the good or service to be purchased is not known at the time of the issue of the voucher, and therefore the VAT will be due at the time of the voucher’s redemption.
Treatment of ICO
During an ICO stage the token serves as a crowdfunding mechanism as it collects funds from investors for the development of future products and services. Since during the ICO no specific good or service is identified, nor a corresponding price for a supply could be fixed, nor is it possible to determine whether the project will be realised and the investors will receive a return, such transactions will be outside the scope of VAT.
There will be no transaction subject to VAT if the money invested will serve to acquire a security in the issuing company.
However, any future use of the issued tokens to serve as a payment and access to products and services developed and offered by the issuer will then be subject to VAT.
Should you require any further information, please contact our Fintech team on email@example.com