The Court of Justice of the European Union received on 02.06.2014 the Preliminary Ruling of The Swedish Supreme Administrative Court (“Högsta förvaltningsdomstolen”) on the interpretation of Article 135.1 of the Directive 2006/112/EC on VAT taxation on bitcoin. The number assigned to the case is C-264-14 (published in the Official Journal C 245 on 28.07.2014, p.7).The preliminary ruling was originated by an advance tax ruling submitted by David Hedqvist (moderator of Section Sweden of bitcointalk.org and founder of www.bitcoin.se), who intended to carry on a business through a switching operation with the virtual currency bitcoin to “fiat” currency.The Swedish Authority for the Ruling first dealt with the Decision 10.14.2013 (ref. 32-12. / I Mervärdesskatt: Handel med bitcoins) on trade in bitcoins.
The Ruling resolved that the absence of the definition of the term “currency” in the VAT Directive leads to the interpretation of this term as a means of payment.In the Article 135.1 of Directive 2006/112/EC letter e) (“transactions, including negotiation, concerning currency, bank notes and coins used as legal tender, with the exception of collectors’ items, that is to say, gold, silver or other metal coins or bank notes which are not normally used as legal tender or coins of numismatic interest”) the term currency is not associated to legal tender. The presence of the exception of the “collectors’ items” that certainly were legal tender, but are not normally used as such because they are collectors’ items, is reported only to coins and banknotes. This excludes the concept of “currency” of the need of legal tender.
On the basis of these considerations:
- Exchange of bitcoin requires similar requirements to intermediation of financial services,
- The bitcoins are a means of payment used in a similar way to legal tender,
- The bitcoin have strong similarities with electronic money.
The Authority for the Swedish Ruling held that bitcoin transactions should be considered as transactions concerning currency referred to in Article 135.1. letter e), consistent with the purposes of the exemptions provided for in Article 135.1. (Avoid the difficulties associated with applying VAT to financial services.). Tax Swedish Tax Authority (Skatteverket) appealed the Decision 32-12. / I to the Swedish Supreme Administrative Court that considered the case (Case No. 7101-13) and resolved to submit a Preliminary Ruling under Article 267 TFEU.The Swedish Supreme Administrative Court reflected that the Court of Justice had never considered how Article 135.1 d), e), f) of the Directive 2006/112/EC must be interpreted with respect to foreign exchange transactions related to virtual currencies. According to the Supreme Administrative Court’s opinion, it is unclear whether any of these exemptions could include those exchange transactions.The Supreme Administrative Court raised the following questions:
- Does the exchange of virtual currency with “fiat” currency constitute a supply of service under VAT Directive?
- In case of positive answer, are the exchange transactions of bitcoin exempt from VAT under article 135.1 of VAT Directive?
On August 21th David Hedqvist published a post on www.bitcoin.se and www.reddit.com/r/bitcoin asking for help funding legal costs for supporting the case hiring a top law firm in Sweden (language of the case is Sweden); the problem was resolved on August, 26th with an anonymous donor who covered all expenses and let Hedqvist hiring Mannheimer Swartling.Many lawyers and tax consultants (included me) offered pro-bono assistance to Heqvist because the case will decide if and how VAT should be applied to bitcoin throughout the EU.
The situation in Europe is very heterogeneous and only a few Member States gave interpretations:
GERMANY: The German Ministry of Finance, answering (DOK: 2013/0752711 and 2013/0883337) to deputy Frank Schaeffler (No. 409 of July 2013, n. 226, September 2013), resolved that bitcoins are “private money” or complementary currencies, used as a means of payment in the multilateral clearing system and based on private agreements.The Ministry denied the exemption as coin and/or foreign currencies (Article 4 number 8 letter b of the German VAT Law – UStG) and considered bitcoin VAT exempt pursuant to point c, (Art. 135.1 d Directive 2006/112/EC), as “transactions, including negotiation, concerning deposit and current accounts, payments, transfers, debts, cheques and other negotiable instruments, but excluding debt collection”; considering that the mere payment does not constitute the provision of the service and therefore not subject to VAT. UNITED KINGDOM: HMCR, with Revenue & Customs Brief 09/14 resolved that:
- Income received from Bitcoin mining activities will generally be outside the scope of VAT on the basis that the activity does not constitute an economic activity for VAT purposes because there is an insufficient link between any services provided and any consideration received.
- Income received by miners for other activities, such as for the provision of services in connection with the verification of specific transactions for which specific charges are made, will be exempt from VAT under Article 135(1)(d) of the EU VAT Directive as falling within the definition of ‘transactions, including negotiation, concerning deposit and current accounts, payments, transfers, debts, cheques and other negotiable instruments.’
- When Bitcoin is exchanged for Sterling or for foreign currencies, such as Euros or Dollars, no VAT will be due on the value of the Bitcoins themselves.
- Charges (in whatever form) made over and above the value of the Bitcoin for arranging or carrying out any transactions in Bitcoin will be exempt from VAT under Article 135(1)(d) as outlined at 2 above.
ESTONIA: The Estonian tax authority (Maksu Tolliamet-ja), in March of 2014, published on its website an interpretation of the taxation of bitcoin, resolving that bitcoin does not fall under any of exemption of article 135.1 of Directive 2006/112/EC, because the financial services are listed and requires certain characteristics that bitcoin does not have. The authority bases its resolution in a strict interpretation of means of payments, electronic money, securities and financial services, considering transactions in bitcoin as provision of services subject to normal VAT taxation. POLONIA: The directors of the local tax authority in Poland (Interpretacja Dyrektora Izby Skarbowej w Łodzi, IPTPP2/443-52/14-6/IR, Poznaniu ILPP1/443-912/13-2/AW, Katowicach, IBPP2/443-762/13/ICz in http://www.epodatnik.pl/) resolved the sale of bitcoin couldn’t be exempted under art. 135.1 of the Directive 2006/112/EC and therefore, as a service, is subject to normal VAT taxation. The interpretations were based on the assumption that the exemptions referred to Directive 2006/112/EC must be interpreted strictly (CJEU Judgment no. C-461/08 paragraph 25) and that the same exemptions (pursuant to art. 131) are subject to the conditions laid down by the Member States, even if is recognized that bitcoin is, at the same time, a unit of account and a payment system, but:
- The payment system does not have any issuers or any institutions to supervise.
- The unit of account cannot be considered a currency due to a lack of legal status.
FRANCE declared (Report to the French Senate) that it will support at the EU level a VAT exemption for bitcoin, in order to avoid reiterating the unfortunate experience of the massive VAT fraud over CO2 quotas. The situation is very concerning, not only for bitcoins, but for every kind of complementary currencies that, under VAT Directive, are not dissimilar to cryptocurrencies, so the decision will impact any kind of private / community currencies.
Stefano Capaccioli is CPA, Auditor, Tax litigator, Tax Advisor, Business Consultant, Specialized in Law & Tax on Gold, Precious Metals and Cryptocurrencies (www.coinlex.it). Arezzo, Tuscany, Italy.