A. INTRODUCTION

ICOs accept recently exploded and become an increasingly pop method of fundraising for start - ups and other companies with the intention to fund innovative projects based on the Blockchain technology.

Our Firm being a business-oriented House has early identified the needs of the business organisation world equally to this innovative technology development based on Blockchain and in this respect has invested towards this direction with the establishment of an ICO team of professionals to embrace all aspects of ICOs and profitable its international clients in this respect.

This is the second publication on the ICO discipline. The get-go publication treatment full general issues of ICOs through Republic of cyprus titled, "Initial Coin Offer (ICO) through Cyprus", can be downloaded from here.

Summary of this publication

With this publication, we shall try to give clarity to the unclear and highly unstable consequence of the Taxation and VAT handling of ICOs from the issuer company'due south perspective. In detail, we shall bargain with the upshot of how the ICO proceeds received past a Cyprus issuing company may be treated, in terms of both straight taxation (Corporate Tax) and indirect taxation (VAT).

The review volition be performed from the perspective of the Cyprus ICO issuing visitor. The tax treatment of the investors or token users would largely depend on the tax laws in their country of residence and information technology is outside the scope of this publication.

In the absence of specific guidelines past the Republic of cyprus Revenue enhancement Authorities on both Revenue enhancement and VAT implications on ICOs, we will express our views based on the basic and key provisions of the Cyprus Tax and VAT Legislations that are currently in forcefulness, while having in heed the general provisions of the International Fiscal Reporting Standards (IFRSs) that relate mainly to income recognition.

It must be stressed that the rights and powers represented by each token issue, are not uniform. As a issue, there is no unmarried respond as to how the issued tokens should exist treated for tax purposes, hence, earlier concluding, careful consideration to the specific characteristics of each case is necessary.

VAT Rate

The currently applicable standard VAT rate for taxable supplies in Cyprus is xix%. As an ICO process involves a multinational approach with participants from all over the earth, subject area to the applicability of the offer, we shall mainly deal with the Vat attribute from Republic of cyprus and in issue European Matrimony (Eu) perspective, where we consider the issued tokens volition exist mainly offered.

Income / Corporate Tax Rate

Cyprus tin become 1 of the most beneficial European union jurisdictions for an ICO domiciliation due to its legal framework and flexible taxation laws based on which business income of a Cyprus visitor is taxed at 12,v% on resulting net profits which revenue enhancement rate may be further reduced subject field to careful revenue enhancement planning.

Intellectual Property (IP) Company

In add-on, Cyprus has a very attractive IP Box Authorities based on which fourscore% of Qualifying Profits generated from Qualifying IPs tin be considered every bit deemed expenses and simply 20% of the income is subject to 12,5% corporation revenue enhancement, reducing thus the constructive tax rate up to 2,five%.

As the nearly common result of an ICO is the development of intellectual belongings (IP), the benefits of the Cyprus IP Box Government with the reduced taxation rate up to 2,5% might also be bachelor to the ICO issuing companies making Cyprus one of the all-time destinations for an ICO having in mind likewise the residue of the surrounding circumstances.

For details of this Cyprus IP company treatment, you may refer to our Revenue enhancement Update publication "The New Republic of cyprus IP Box Regime" which can be downloaded from here.

The type of visitor to exist used for the scope of our publication

The type of company for which we are considering the TAX and VAT treatment in an ICO prospect is the Cyprus Private Company Limited by Shares (LTD), being taxation resident of Cyprus as we consider this type of company to be the nigh suitable vehicle for the intended operation of an ICO having a business concern nature and characteristics.

We have seen, mainly for tax reasons, foreign Foundations to exist used equally vehicles in ICO projects. Their charitable nature renders information technology questionable whether Foundations are indeed e'er a proper solution for all types of ICOs.  It has also been suggested that Express Liability Companies by Guarantee with or without share capital or even Purpose Trusts as another option.

For various reasons which are not the subject of discussion on this publication, we shall not examine those possibilities which might be the appropriate vehicles for particular type of ICOs having a philanthropic or charitable nature just not a business 1.

On the opposite, a Cyprus non-tax resident Private Visitor Express by Shares might exist an option nether the appropriate factual conditions but again we do not favor such approach, despite its tremendous Tax and VAT benefits from a Republic of cyprus police force perspective. The hidden risks involved in such approach makes us reluctant to suggest or consider such an approach.

B. TYPES OF TOKENS

The Tokens, subject to the particular event, are in effect "contracts" granting certain rights to the investors or users. The issuing visitor decides the rights or claims it undertakes to grant to the investors or users through the tokens.

Discipline to the characteristics of the outcome, tokens may accept different forms and classifications.

We consider that in their simple course, tokens may be any one of the post-obit categories:

Pure Payment - Currency Tokens

These are tokens like to cryptocurrencies, with an exclusively transactional purpose, which do not have any connexion with any project or equity in the company. They are designed to be used solely equally a ways of payment. Such tokens practice not accept the characteristics of a security.

Pure Utility Tokens

These are tokens used to access products and services offered in the platform of the issuer. The issuing company has contractual obligation to exchange them with a service or production or assuasive the use of the platform offering various services or products. They exercise not have any connectedness with the equity of the visitor. Such tokens practise not have the characteristics of a security.

Pure Asset - Investment Tokens

These tokens are analogous to equities, debentures or derivatives. They are granting rights to dividends similar equities / shares or to interest payments like bonds or to payments linked with the performance of a specific asset of the company like derivatives. Such tokens accept the characteristics of a security.

The hybrid nature of a token

Despite the above classification of the tokens in the iii main categories, the majority of the tokens issued are of hybrid nature which take at a certain degree, components of all the 3 classes identified in a higher place or any two of them. They are in consequence, of Payment – Currency nature and/or Utility nature and/or Asset – Investment nature, all mixed together.

Ultimately, the taxation treatment of such hybrid tokens will depend on whether they are classified as beingness within any of the above 3 primary categories in the concept they will be used.

In effect, if a detail hybrid token is used at particular example as a Utility token then information technology might exist treated every bit such and if in another occasion the same token will exist used as a Payment - Currency token, then information technology might be treated as such, despite its hybrid grapheme.

In this respect, our publication volition mainly deal with the Revenue enhancement and VAT treatment of the higher up 3 main categories of tokens leaving the hybrid nature of the tokens exterior the below analysis.

Nomenclature of tokens

The complex process of the classification of tokens in any i or a combination of the above categories in the context of an ICO, will non be the subject area of this publication but to a forthcoming ane in this respect.

Securities

For clarification purposes, the meaning of securities we adopt in this publication is the meaning of securities given nether the Cyprus Prospectus police force which information technology refers to transferable securities under the MiFID 2 definition as follows:

"transferable securities" means those classes of securities which are negotiable on the capital market place, with the exception of instruments of payment, such as:

(a) shares in companies and other securities equivalent to shares in companies, partnerships or other entities, and depositary receipts in respect of shares;

(b) bonds or other forms of securitised debt, including depositary receipts in respect of such securities;

(c) whatever other securities giving the right to acquire or sell whatever such transferable securities or giving rise to a greenbacks settlement determined by reference to transferable securities, currencies, interest rates or yields, commodities or other indices or measures;

Whether a particular type of token is a security or non, will not be the bailiwick of this publication but of a forthcoming 1 in this respect.

C. ACCOUNTING Handling AND THE CORRESPONDING TAX AND VAT IMPLICATIONS OF ICOs.

In gild to be able to discuss the tax implications of ICOs for the issuing company, we starting time need to understand the classification of the relevant tokens based on their legal and economic characteristics on a case by case basis and and so to refer to the accounting treatment of the relevant issuance in the books of the issuing company.

More specifically, nosotros demand to check whether the proceeds of an ICO tin can be recognized as Revenue in the Income Statement of the company according to IFRS 15 'Acquirement from Contracts with Customers' and be taxed accordingly in the hands of the ICO issuing visitor.

Revenue recognition nether IFRS 15 is based on the transfer of control. Control is divers as the ability to direct the utilise of and obtain essentially all of the remaining benefits associated with the asset.

Therefore, the fundamental point for the correct bookkeeping treatment of the ICO gain volition depend on whether in that location is a transfer of control of an asset and if yes, to decide if the transfer of control happens over time.

Having considered the characteristics of the same categories of ICOs and the provisions of IFRS 15 mentioned above, we shall effort to analyze the accounting and the respective taxation treatment of each category.

I. Payment - Currency Tokens

Past issuing tokens that qualify as a means of payment, (such every bit Bitcoins, Ether or Litecoin), the issuing visitor seems to have no other contractual obligation towards the token holder, other than the actual transfer of the tokens to the potential holders. As such, the auction of tokens triggers a taxable outcome and thus acquirement should be recognised on the auction of payment - currency tokens.

The ICO gain (either in cryptocurrency or in whatsoever other fiat currency) will demand to be translated to the reporting currency in which the issuing company presents its Fiscal Statements and taxed accordingly.

Revenue enhancement handling of Payment - Currency Tokens

ICO proceeds from the sale of tokens in the above category, seems to constitute taxable income in Cyprus for the issuing visitor, thus they are subject to 12,5% corporation tax on cyberspace profits.

The taxable amount tin can be reduced with careful tax planning. The related tax allowable expenses i.e. development of the relevant engineering science may be taken into account accordingly.

VAT treatment of Payment – Currency Tokens

The Court of Justice of the European Matrimony (ECJ), in its Hedqvist decision, Example 264/fourteen, explained that bitcoin (a cryptocurrency) represents a straight means of payment between the operators that take it, therefore, the transaction concerning the exchange of bitcoin for fiat currency may fall within the telescopic of the exemption under Article 135(one)(e)   of the EU VAT Directive 2006/112/EC, roofing, inter alia, currency, bank notes and coins used equally legal tender.

Consequently, 1 may argue that the exchange of payment tokens nether an ICO for other cryptocurrencies or fiat currency could also qualify as an exempt transaction, within the telescopic of the exemption under Commodity 135(one)(e) of the Eu VAT Directive 2006/112/EC and in this respect is exempt from VAT.

Ii. Utility tokens

Where the utility token simply defines a pre-paid correct to swallow an issuing visitor'southward goods or services, reference should be made to IFRS 15 'Revenue from Contracts with Customers'.

1 may argue that, revenue cannot be recognized in total at the time of the ICO sale if the issuing company has additional contractual obligations towards the investor or user. It must be recognized over time as the functioning obligation is satisfied. The utility token is equivalent, in effect, to an unsecured, non-interest bearing promissory note issued in substitution for goods or services that may or may not exist however.

In other words, revenue should exist recognized at the time the token is presented to the issuing visitor for redemption into appurtenances or services.

Further, due to the IFRS 15 requirement to defer revenue until the company'due south performance obligation is met, the issuing company should recognize a deferred revenue liability at the time of the ICO which volition be converted gradually to income every bit the obligations (i.e. the provision of a product or a service) are performed.

TAX treatment of Utility Tokens

The tax liability of a Utility Token is, based on the above, deferred until the point the issuing company will exist actually providing the goods or services. Therefore, at issuance in that location may exist no tax liability for the issuing visitor.

Once the operation obligation is satisfied, i.e. when the issuing company volition offer the service or product to the investor or user, so the associated income will exist taxed nether corporation tax at a rate of 12,5% on resulting internet profits at the end of the financial twelvemonth.

Utility Tokens tin therefore be very bonny since they result in no equity dilution every bit the company does not issue new shares and at the same time information technology achieves tax liability deferral.

IP Company – Cyprus IP Box

Careful consideration of the specific characteristics of each example will be required in order to decide whether the visitor's engineering science will exist considered as Qualifying Intangible Property and thus the income generated therefrom to qualify under the Cyprus IP Box and be subject to constructive taxation rate up to 2,5% equally explained in a higher place.

VAT treatment of Utility Tokens

According to the Eu VAT Law, a supply of services is rendered for consideration within the meaning of Article 2 of the VAT Directive and can therefore be subject to VAT, only if a directly link exists between the services supplied and the consideration received by the taxable person.

During the ICO stage, the issued tokens are used every bit a means of collecting funds for the development of future products and services past the issuing company. At this point, neither the service nor the corresponding price can be clearly identified. If the project undertaken by the issuing visitor is not successful, the investors might get nada in render.

Having this in mind, it may be argued that at the time of an ICO, there is no straight link betwixt the tokens issued and the services rendered and thus at that place is no taxable event. In other words, it may be argued that at the time of result, the gain received do not fall within the scope of VAT and an ICO itself may non be regarded equally a taxable event for VAT purposes in Republic of cyprus in the instance of Utility tokens.

Utility tokens and Multi-purpose vouchers

I could likewise associate the fundamental legal characteristics of Utility tokens with the and then called multi-purpose vouchers for VAT purposes.

At the time of sale of a multi-purpose voucher, the voucher is not subject area to VAT equally there is difficulty in establishing the direct link between the payment of the voucher itself and the exact services to be offered. Only the actual handing over of the goods or services in return for a multi-purpose voucher is considered every bit a vatable upshot (Commodity 30b of amended VAT Directive).

In other words, multi-purpose vouchers will only exist subject to VAT when the voucher is redeemed. No VAT will exist due when the voucher is transferred through the supply chain. The value on which VAT should be accounted for, is either the net price paid by the consumer, or if that is not known, the cyberspace confront value of the voucher.

The handling of multi-purpose vouchers may be argued that is correspondingly applicable to Utility tokens and in effect at the time of an ICO, issued Utility tokens might non trigger a taxable result for VAT purposes. After the ICO, whatsoever future use of such tokens equally a means of payment and access to products and services offered by the issuing company may be subject to VAT considering the item facts of each case and the possibility of applying the exemptions provided past commodity 135 of the VAT Directive.

This argument is further substantiated by the fact that the opposite standpoint would atomic number 82 to double taxation, as VAT would be applied both upon:

  1. The issue of a token and

  2. Its subsequent apply equally a means of payment for specific products/services provided by the issuing company.

The VAT treatment of the exchange of utility tokens with products and/or services of the issuing company should follow the VAT treatment of the underlying production (origin and destination of the products) or service (i.e. the place where the recipient of the service belongs).

If the place of supply of a transaction is considered to be within European union, then the VAT applicable charge per unit in that Member State volition use. If the place of supply is considered to be outside European union, then the transaction is outside the scope of European union VAT Law.

Special Attention needed!

The VAT handling of Utility tokens needs special attention and consideration in one case the Utility tokens will be offered inside EU Fellow member States to persons not exercising economic activities. In particular, in the case that the service offered is considered every bit an electronically supplied service, then the issuing company volition have to:

  1. either annals with all Member States to which it provides services to persons not exercising economic activities and apply the local VAT rate on the relevant supplies or

  2. to register with the Mini One Cease Shop (MOSS) organisation in Cyprus which enables the company to charge the VAT rate applicable in other Member States in a unmarried declaration.

Information technology is besides important to clarify that the aforementioned VAT treatment applies both for companies established in a jurisdiction inside and exterior Eu.  If the services to be offered in commutation for utility tokens are considered as electronically supplied services, then the issuing foreign company (i.e. Swiss, USA, Cayman Isle, BVI or of some other jurisdiction company) has to:

  1. either go registered with all MS to which information technology provides services to persons not exercising economical activities and use the local VAT charge per unit on the relevant supplies or

  2. to register with the Mini One stop shop (MOSS) organization in a MS of their pick (i.e. Cyprus) which enables the company to charge the VAT charge per unit applicable to other MS in a single declaration.

As the omission of compliance with VAT provisions might entail criminal liability in add-on to the heavy penalties in default, the issuers must consider seriously this aspect of ICOs and receive proper VAT advice on time, instead of receiving the heavy bills and possible prosecution afterwards!

Iii. Nugget - Investment Tokens

These are tokens which accept like characteristics to:

  1. Disinterestedness shares in a company, entitling the holder to buying rights, dividends or voting rights, or

  2. Bonds, entitling the holder to interest payments, or

  3. Derivatives, entitling the holder to payments linked to the performance of a specific asset of the company.

I may argue that the proceeds generated from an ICO with tokens having the above characteristics, practice not run across the definition of Income nether IFRS xv, explained above and should therefore be classified either as equity or every bit a liability in the books of the issuing company.

It remains to exist seen though, if based on the prospective ICO regulations, if any, tokens classified as disinterestedness volition be treated similarly to the share uppercase of the company or they will exist treated as an additional reserve of the issuing visitor.

Tax treatment of Asset – Investment Tokens

As the issuance of Nugget – Investment tokens might non be reflected in the income statement of the company equally acquirement, but instead in the equity or liabilities of the company in the Argument of Financial Position, it might not trigger any taxable consequence for corporation tax purposes.

If based on the prospective ICO regulation, if any, equity tokens are considered to have the same characteristics every bit the share capital of a visitor, they might be field of study to once off uppercase duty of 0.6% in Cyprus, something that seems not to be applicable in tokens having similar characteristics with debentures (i.e. debt tokens).

One could likewise merits that in case the issued Asset – Investment tokens have like characteristics with the share capital of a company, once regulated, they might too exist eligible for Notional Interest Deduction (NID) on the new capital introduced into the visitor. For more details as to Notional Involvement Deduction (NID) applicability please refer to our Tax Update which can exist downloaded here.

Finally, if the issuance refers to debt tokens, equivalent of loans that deport an involvement rate on the primary amount loaned to the company, such issuance would normally exist reflected in the liabilities of the issuing company, generating no taxable income for the company.

If the gain generated from a loan related token are used in the production of taxable income, then any interest element associated with this taxable income should be considered every bit an allowable expense for revenue enhancement purposes reducing thus the taxable base of the company.

VAT treatment of Asset - Investment Tokens

Every bit with the utility tokens mentioned in a higher place, it is of import to analyse what the investor gets in exchange for the Nugget – Investment tokens.

As the relevant tokens requite rise to dividends, or interest payments, we need to examine whether they autumn within the scope of the exemption under Manufactures 135(1)(b) and (f) of the Eu VAT Directive 2006/112/EC.

The above article specifically exempts:

  1. the granting and the negotiation of credit and the management of credit past the person granting it, and

  2. transactions (including negotiation but non direction or safekeeping) in

i.   shares,

2.  interests in companies,

three. debentures and other securities,

Based on the to a higher place 1 may contend that Asset – Investment tokens volition nigh probably authorize as an exempt transaction for VAT purposes and would therefore not create any VAT liability for the issuing visitor.

D. SUMMARY TABLE

The to a higher place discussed as to the VAT and Tax treatment of ICO tokens has been summarised in the below tabular array for easy reference.

ICOs are an innovative and quick method for companies to heighten capital just should not be seen equally an easy style to circumvent laws and regulations. Even without specific regulation on the thing, an ICO would still need to run into the full general provisions and requirements of other general laws, such as Contract Constabulary, Financial Securities Laws, AML Laws, General Data Protection Laws, VAT Laws and Taxation Laws.

The objective is ever to have a proper construction that is able to attract potential investors or users and at the aforementioned time optimise corporate and indirect tax outflow, thus the pick of jurisdiction for the ICO-issuing entity is of utmost importance. The chosen jurisdiction should exist an appropriate jurisdiction for both regulatory and revenue enhancement purposes.

Irrespective of the fact that currently in that location is no specific ICO regulation in identify, Cyprus can still play a significant function in this field as its legal and tax legislation provide the required flexibility.

With the proper guidance and professional advice, an ICO through Cyprus, engaging, among others, a Cyprus visitor, may get a solid valuable method of financing companies and give a heave to innovative engineering science and infrastructure.  – On this matter, you may refer to our publication, "Initial Coin Offering (ICO) through Cyprus" which you may download from hither.