ICO Accounting and Taxes
Before talking about the taxation of the issuing company in an ICO, you first need to understand the classification of tokens according to their economic and legal characteristics in each case, and then enter them in the appropriate section of the accounting of the issuing company.
In particular, it is necessary to check whether the funds from the ICO can be considered income in the income statement of the company in accordance with IFRS 15 “Revenue from contracts with customers” and be taxed accordingly for the issuing company ICO.
The recognition of income in accordance with IFRS 15 is based on the transfer of control. Control is the ability to use and receive all other benefits associated with an asset.
Thus, the key point for the correct accounting of proceeds from the ICO depends on whether the transfer of control over the asset occurs, if so, then decide on the time of transfer of control.
Having examined the characteristics of the above ICO categories and the provisions of IFRS 15, we will try to analyze the accounting and tax regime of each category.
Payment, currency tokens
By issuing tokens that qualify as a means of payment (for example, bitcoins, ether or litecoin). The issuing company has no other contractual obligations towards the token holder, except for the actual transfer of funds to users. Therefore, the sale of tokens is taxable, and income is recognized upon sale.
Revenues from ICOs (in cryptocurrency or in any other fiat currency) must be translated into the currency in which the issuing company submits its financial statements, and then they are taxed accordingly.
Payment Token Currency Taxes
The funds received from the sale of tokens at the ICO for the issuing company in Cyprus are income and are subject to a 12.5% net income tax.
The taxable amount can be reduced by thoughtful tax planning, using acceptable costs, which should be included in the report.
VAT on payment tokens-currency
The European Union Court of Justice (ECJ), in its Headquist decision, Case 264/14, explained that Bitcoin (cryptocurrency) is a direct payment method between operators that accept it. Therefore, a transaction involving the exchange of bitcoin for fiat currency may be subject to a tax exemption according to Article 135 (1) (e) of the EU VAT Directive 2006/112 / EC, covering, inter alia, currency, banknotes and coins used as legal tender.
Therefore, if you qualify the exchange of payment tokens under the ICO for other cryptocurrencies or fiat currency as a transaction within the framework of VAT exemption in accordance with Article 135 (1) (e) of EU Directive 2006/112 / EC, then you do not need to pay VAT.
If the commodity token simply determines the prepaid right to consume the goods or services of the issuing company, reference should be made to IFRS 15 “Income from contracts with customers”.
It can be argued that the income cannot be fully recognized at the time of the sale of the ICO, if the issuing company has additional contractual obligations to the investor or user. It will be recognized after the time when the obligations are fulfilled. A commodity token is equivalent to an unsecured interest-free bill issued in exchange for goods or services that are unknown whether they will or will not be provided.
In other words, income is recognized when the token is provided to the issuer for repayment of goods or services.
Further, in accordance with the requirements of IFRS 15 “Deferred income” until the company’s obligations are met. The issuing company recognizes the tax liability of the ICO, which will eventually be converted into income as the service is performed or the product is received.
Commodity Token Tax
Based on the foregoing, taxation of commodity tokens is deferred until the actual issuing of goods or services by the issuing company. Therefore, when issuing tokens, the company does not have tax liabilities.
After the obligations are fulfilled, that is, when the issuer or supplier provides the service or product to the investor or user, the corresponding income will be taxed at 12.5% of the total net profit at the end of the financial year.
Thus, commodity tokens are advantageous in that they do not lead to “dilution” of shares and a decrease in the shareholder in the capital of the company (since new shares are not issued), and in addition, the company receives a tax deferral.
IP Company – Cyprus IP Box Mode
To qualify for the Cyprus IP Box regime and pay a small 2.5% income tax, you need to carefully study each situation.
VAT on commodity tokens
According to the EU VAT law, the supply of services is considered on the basis of Article 2 of the VAT Directive and, therefore, can be taxed only if there is a direct relationship between the services provided and the remuneration received by the taxable person.
At the ICO stage, the issued tokens are used as a fundraiser for the issuing company to develop future products and services. At this point, neither the service nor the corresponding price has been determined. If the project implemented by the issuing company is not successful, investors may not receive anything in return.
In other words, it can be argued that at the time of the transaction, the funds received do not fall within the scope of VAT and ICOs with commodity tokens cannot be considered as taxable in Cyprus.
Commodity Tokens and Multipurpose Vouchers
You can tie commodity tokens to the so-called multi-purpose vouchers to determine the VAT.
At the time of sale, a multi-purpose voucher is not subject to VAT, since there is no direct relationship between the payment of the voucher itself and the services that will be offered. Only the actual transfer of goods or services in exchange for a multi-purpose voucher is considered an event to be discussed (Article 30b of the amended VAT Directive).
Multipurpose vouchers are subject to VAT when the voucher is redeemed. When transferring a voucher through a supply chain, no VAT will be charged. The amount by which VAT should be calculated is either the price paid by the consumer or the face value of the voucher.
It can be argued that multi-purpose vouchers are applicable to commodity tokens and are valid during the ICO. Issued commodity tokens are not subject to VAT. After the ICO, the use of such tokens as a means of payment or access to products and services offered by the issuing company may be subject to VAT, taking into account a number of circumstances in each case, also applying exemptions provided for in Article 135 of the VAT Directive.
This argument is further justified by the fact that otherwise, there will be double taxation, since VAT is levied for:
issue of tokens;
its subsequent use as a means of payment when purchasing products / services provided by the issuer.
The VAT on commodity tokens in exchange for products or services of the issuing company corresponds to the taxation of the base product or service in the place where the recipient of the service is located.
If the transaction is carried out within the EU, then the VAT rate applicable in that Member State is applicable. If outside the EU, then the transaction goes beyond the EU VAT legislation.
If tokens will be offered in EU member states to persons not carrying out economic activities, as a service provided electronically, then the issuing company needs to do one of two things:
register in all Member States in which it provides services to non-business entities and apply the local VAT rate;
register with the Mini One Stop Shop (MOSS) system in Cyprus, which allows the company to charge the VAT rate applicable in other member states in one declaration.
It is also important to clarify that the aforementioned VAT regime applies both to companies established in the EU’s jurisdiction and beyond. If the services offered in exchange for tokens are considered as services provided electronically, then the foreign issuing company (for example, Swiss, USA, Cayman Island, BVI or another company of jurisdiction) must:
register with all MSs to whom it provides services to non-business entities and apply the local VAT rate;
register in the Mini One stop shop (MOSS) system in the country of your choice (i.e. Cyprus), which allows the company to charge the VAT rate applicable to other countries in one declaration.
Failure to comply with VAT regulations may result in criminal liability in addition to large fines for default. Therefore, issuers should seriously consider this aspect of the ICO and get proper advice on VAT on time to avoid getting huge bills and possible legal prosecution!
Valuable investment tokens
These are tokens that have similar characteristics to:
- shares of a joint stock company giving the owner the right of ownership, dividends or voting rights;
- interest-bearing bonds;
- derivative financial instruments giving the holder the right to payments related to the execution of a specific asset of the company.
Funds received from ICOs with tokens having the above characteristics do not meet the IFRS 15 Income Definition described above and therefore should be classified either as equity or as cash liabilities in the accounting of the issuing company.
However, it is still necessary to figure out how to treat tokens (according to ICO rules, if any). Tokens classified as equity will be treated similarly to the company’s share capital or as an additional reserve to the issuing company.
Value Token Tax
Since the issue of valuable tokens is not reflected in the company’s declaration as income, it may not be taxed.
If, based on ICO regulations, stock tokens are considered to have the same properties as the company’s share capital, they may be subject to a one-time fee of 0.6% in Cyprus, which is not applicable to tokens that have similar characteristics with debt obligations (i.e. debt tokens).
If the issued tokens have similar properties with the company’s share capital, after regulation, they are also entitled to a conditional interest deduction (NID) for new capital introduced into the company. For more information on applying contingent interest deduction (NID), see our tax update, which can be downloaded here.
Finally, if the issue relates to debt tokens equivalent to loans that have an interest rate on the principal amount provided to the company, such an issue is usually reflected in the obligations of the issuing company and the funds received are not taxed.
If the income derived from the loan equivalent is used to pay tax, then any percentage element related to this taxable income should be considered a tax expense, thus reducing the tax base of the company.
VAT on valuable tokens
As with the commodity tokens mentioned above, it is important to analyze what the investor receives in exchange for investment tokens.
Since the corresponding tokens result in dividends or interest payments, we need to find out whether they fall within the scope of the exemption from payment in accordance with Articles 135 (1) (b) and (f) of the EU VAT Directive 2006/112 / EC.
According to the article, the following are exempt from payment:
- person providing, coordinating and managing a loan;
- transactions (including negotiations, but not management or custody) on stocks, debt instruments and other securities.
Based on the foregoing, it can be argued that valuable tokens will most likely qualify as a transaction exempt from VAT and, therefore, will not be subject to VAT.
The goal is to create a structure that can attract potential investors or users and, at the same time, optimize the outflow of corporate and indirect taxes. Therefore, the choice of jurisdiction for the organization issuing the ICO is of paramount importance. The jurisdiction chosen should be suitable for both regulatory and tax purposes. An ICO is an innovative and quick way for companies to raise capital, but should not be seen as an easy way to circumvent laws and regulations. Even without special regulation on this issue, when conducting an ICO, it is necessary to comply with the general provisions and requirements of other laws. Such as the Law on Contracts, the Laws on Financial Securities, the Laws against Money Laundering, the General Data Protection Laws, the VAT Laws and the Tax Laws.
Although there is currently no specific regulation for ICOs, Cyprus can play a significant role in this area, as its legal and tax laws provide the necessary flexibility.
With proper guidance and professional advice, an ICO through Cyprus, with the involvement of a Cyprus company, can become a reliable way to finance companies and give impetus to innovative technologies and infrastructure. For this issue, you can refer to our publication “Initial Coin Offer (ICO) through Cyprus”, which you can view on our website.
We draw your attention to the fact that this article is for informational purposes only. For more advice, contact us at the contacts listed on the site.