Switzerland: Tax Newsletter December 2018: Taxation Of Blockchain And Crypto Currency

Last Updated: 3 January 2019
Article by Roland Böhi, Danielle Wenger and Manuel Vogler

I. Introduction

So called Initial Coin Offerings ("ICO") as a new fundraising mechanisms in which new projects sell their underlying crypto tokens in exchange for e.g. Bitcoin or Ether, have often been discussed in recent months. In order to contribute our part in this dialog we would like to discuss a fictional case of a company intending to finance the development and fabrication of its product through an ICO. In this connection we observe the different stages of a planned ICO from a Swiss tax perspective and provide an overview of the different tax issues relating to this topic.

II. Fictional Case

Nurse Robo Ltd. based in Zug, Switzerland plans to develop, produce and sell a robot for the nursing industry which will facilitate the daily care of the elderly. Apart from the development and the production of the nursing robot the corporation plans to create a platform on which customers will have access to the "Nurse Robo Education Program" and further services of Nurse Robo AG in connection with the nurse robot.

In order to finance the robot and the platform Nurse Robo Ltd. will firstly launch a pre-ICO round to a limited number of investors who can purchase a pre-emptive right on a certain amount of "Robo- Coins". Secondly Robo-Coins will be issued in the course of the ICO and allow its owners to access the platform, to buy the Nurse Robot with the Robo Coin on the platform and to participate in 10% of future gains of Nurse Robo AG.

III. Token Definition

3.1 Legal background

The analysis of tax issues regarding an ICO requires that the token or coin is firstly qualified from a legal point of view. At the moment there exists no binding legal qualification of tokens. However, on 16 February 2018 the Swiss Financial Market Supervisory Authority ("FINMA") published guidelines for enquiries regarding the regulatory framework for ICOs. FINMA categorized tokens according to the underlying economic function of a coin into: payment tokens, utility tokens and asset tokens.

FINMA qualified payment tokens as tokens which are intended to be used, now or in the future, as a means of payment for acquiring goods or services or as a means of money or value transfer. Cryptocurrencies give rise to no claims on their issuer.

Utility tokens were defined as tokens which are intended to provide digital access to an application or service by means of a blockchain-based infrastructure.

Finally, asset tokens were described as tokens which represent assets such as a debt or equity claim on the issuer. Asset tokens promise, for example, a share in future company earnings or future capital flows. In terms of their economic function these tokens are analogous to equities, bonds or derivatives. Tokens which enable physical assets to be traded on the blockchain also fall into this category.

However, FINMA pointed out that the individual token classifications are not mutually exclusive. Asset and utility tokens can also be classified as payment tokens (referred to as 'hybrid tokens'). In these cases, the requirements are cumulative; in other words, the tokens are deemed to be both securities and means of payment.

3.2 Categorization of Robo-Coin

According to the token definitions of FINMA, Robo Coins entail characteristics of payment (purchase of Nurse Robo), utility (access to the Robo Nurse platform) as well as asset tokens (10% participation on future gains) and are, therefore, considerably hybrid tokens.

IV. Tax 'life cycle'

The following description of the tax 'life cycle' of the ICO of Nurse Robo AG will follow the same pattern and outlines the tax implications of the income tax, the stamp duties, the withholding tax ("WHT") and the value added tax ("VAT"). It should be noted that for editorial reasons we will only analyze the tax implications from the perspective of Nurse Robo AG in this newsletter but not of other involved parties (e.g. investors, managers).

4.1 Phase 1: Pre ICO

4.1.1 Income tax

The income generated by the private sale will be subject to corporate taxes. However, the payment of the token holders to Robo Nurse Ltd. can normally be booked as accruals according to the estimated budget for the development and production of the nurse robot. As a consequence, in the token generating income year, the payment of the investors have generally limited income tax implications for Robo Nurse Ltd.

4.1.2. Stamp duties

The purchase of the pre-emptive right of the Robo Coin should not be subject to the one-time capital duty (1%) or the securities transfer tax (0.15%), since at that point of time the investor has neither equity rights nor debt claims against Robo Nurse Ltd. as she or he only acquires a pre-emptive right on the Robo Coin.

4.1.3. WHT

The sale of the pre-emptive rights should not entail any WHT consequences as the generated income is not considered a corporate right for withholding tax purposes.

4.1.4. VAT

At the time of the pre ICO, Robo Nurse Ltd. will not be subject to VAT since the income relating to the sale of the pre-emptive rights is considered as a turnover in the field of money and capital transactions and should, therefore, be exempt from VAT.

4.2 Phase 2: ICO

4.2.1. Income tax

The income generated by the ICO will again be subject to corporate taxes but can be booked as reasonable accruals. This again should entail immediate income tax consequences for Robo Nurse Ltd. Future development expenses can be off-set against the release of the provision.

4.2.2. Stamp duties

The issuance of Robo Coin should not be subject to the one-time capital duty. At this point in time, Robo Nurse Ltd. will not qualify as Swiss security dealer. Hence, no securities transfer tax should become due as consequence of the ICO.

4.2.3. WHT

Although Robo Coin entitles its holder to participate on 10% of future gains of Robo Nurse Ltd., it seems to be a fair position to state that payments based on Robo Coins which were issued during the ICO should neither be considered as dividends nor as interest payments. This should not change under the situation that the payment to the investors depends on whether Robo Nurse Ltd. is profitable or not.

4.2.4. VAT

The VAT classification of a coin or token is currently quite challenging as no respective guidelines exist in Switzerland. However, if an ICO is undertaken in Swiss territory, the VAT implications of the ICO must be analysed according to the transaction and the legal relationship which are subject to Robo Coins in order to determine, whether the ICO may entail any VAT liabilities. Given that there is a relation to Swiss territory, the payment and asset token character of Robo Coin should not entail any VAT liabilities as they are again to be classified as a turnover in the field of money and capital transactions and therefore exempt from Swiss VAT. However, the utility token character of Robo Coin could entail VAT implications for Robo Nurse Ltd. as the company provides various services and rights to the token holder such as the access to the Robo Nurse platform and the right to use the Nurse Robo Education Program as well as further services of Nurse Robo Ltd. These services could be considered a taxable supply of goods or of services.

4.3 Phase 3: Going live and sale of good

4.3.1. Income tax

Running research and development costs ("R&D costs) have to be accounted against the accruals relating from the ICO. Provided that the R&D costs of the Nurse Robot are within the scope of the planned budget, the accruals relating from the ICO should dissolve completely. If the R&D costs are lower than the projected budget, the release of the remaining part of the booked accruals would generally be subject to income tax. A potential loss may be considered as a tax loss carried forward.

Potential conversion gains associated with the exchange of Robo Coins into fiat currency would also be subject to income tax.

Assuming the sale of the Nurse Robot would be highly profitable, all generated income would be subject to income tax. However, further R&D and operational costs could be deducted from the taxable income as business expenditures.

4.3.2. VAT

Regarding the VAT implications in this phase we refer to the above mentioned (cf. para. 4.2.4.).

V. Conclusion

This high-level case study of Robo Nurse Ltd.'s ICO displays the various tax issues related with this new way of corporate financing. Although the crypto-technology is rather new in Switzerland's jurisdiction, Swiss tax law already offers numerous solutions regarding such tax implications. Therefore, Swiss tax law must not be adopted significantly to this new technology. It is rather the technology which must be incorporated in our existing (tax) law. Relevant tax aspects should be subject to upfront tax rulings with the Swiss tax administration. Normally such rulings will be responded within 2-8 weeks. Should you plan to make an ICO or should you have any questions regarding crypto technology and Swiss tax law, please do not hesitate to contact us any- time.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
 
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions