The taxation applicable to Initial Coin Offerings (“ICOs”) has, until now, been a real challenge for tax practitioners.
In Europe, many technology start-ups have recourse to disintermediated and participative fundraising, which leads them to issue tokens created under a blockchain protocol acquired in exchange for cash (or even crypto money) in order to develop their collaborative platform.
Blockchain technology constitutes the matrix of this architecture, which aims to exchange goods, services, and financing without any controlling body. In addition to the many legal issues that such fundraising raises, the tax authorities are obviously interested in these exchanges of cash, goods, and services and are trying to respond to the conceptual challenge that this new economy reveals.
The publication during the summer by the tax administration of its position, much awaited by specialists, on the VAT liability of a public offer of tokens gives us the opportunity to discuss some of the topics encountered.
On the occasion of ICOs, tokens are given to subscribers in exchange for their investments, which may take several forms: crypto money (Bitcoin, Ether, etc.), euros, contributions to the industry, etc. In principle, the token is not a title to any capital value issued by the issuer, but rather a right to enjoy certain future services or goods generated by the digital platform once it has been developed.
With respect to VAT, the administration recalls in its rescript that a transaction falls within the scope of VAT as soon as there is a direct link between the service rendered or goods acquired and the counter value received. Consequently, it is necessary to investigate whether the so-called “usage” tokens, which can be exchanged for goods and services, only give their purchaser a potential right to benefit from the supply of services or goods, in particular, if the activity for which the issue was made is actually launched.
Due to the existence of contingencies on the very principle of future consideration, there is no direct link within the meaning of VAT at the time of the issue and acquisition of the token with any goods or services. The administration deduces from this that at the time of the raising of funds giving rise to the delivery of tokens within the framework of the ICO, the sums received by the company issuing the tokens do not have to be subject to VAT.
The answer is welcome because subjecting these sums to VAT would have cut the start-ups by 20% of the investment, they need to develop their activities, which would probably have destroyed the chances of success of such operations in Europe.
The administration adds several essential additional elements and, in particular, that the fact that the sums received at the time of the ICO are not subject to VAT does not affect the possibility for the issuing company to deduct the VAT charged on its input expenses. Indeed, despite the absence of a direct link between the provision of the service and the payment, it recalls that such expenses maintain a direct and immediate link with the entire economic activity of the taxable person.
Of course, the subsequent use of the tokens to acquire goods and services will be subject to VAT. The question also arises as to the basis of the taxation of VAT. Indeed, between the date of issue of the tokens and their future use on the developed digital platform, several years should elapse during which the value of the said token may have varied, taking into account the development of the platform.
The tax authorities indicate that the VAT base for the use of the token by the purchaser is equal to the amount of the consideration obtained at the time of the initial sale of the tokens, regardless of any upward or downward fluctuations in their value.
In addition, the European tax authorities consider the case where the acquisition of tokens gives access to a set of goods or services determined at the time of their issue. In such a case, it refers to the rules applicable to the use vouchers referred to in Article 256ter of the European General Tax Code which, as regards multiple-use vouchers, do not subject the sale of these vouchers to VAT, but only their use by their holders in the acquisition of the goods and services concerned. Issues of “security tokens” are also exempt from VAT.
The other taxes applicable to these ICOs have not all been specified in such detail at this time, often because general tax or accounting principles provide answers to the questions they raise. Solutions exist and this recent rescript from the tax authorities shows that the tax environment is positive.
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