The Finnish Central Board (CBT) of taxes today declared that exchanges were providing “banking services.” The commission rates charged by exchanges were, therefore, in accordance with the EU VAT Directive, exempt from VAT (Value Added Tax).
EU Directives, such as the VAT Directive, specify certain goals to be achieved by member states. The member states are granted considerable discretion as to how they will achieve these goals (see Article 288 of the Treaty on the Functioning of the European Union). “EU Regulations,” in contrast, specify both the goals and the means by which States must achieve them.
The EU VAT Directive (Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax) applies to goods and services sold within the EU. Its aim is to harmonize VAT Law among EU Member States. It specifies that VAT rates must be within a certain range within all EU countries, but leaves it up to member states to decide where in the range their rates will fall. Article 135(1) of the VAT Directive grants an exemption for all “financial services”.
In their decision, the CBT concluded that exchanges are providing a financial service and are, therefore, exempt from VAT (per Article 135(1)). Finland’s position can be compared and contrasted with other EU countries.
Belgium’s Federal Public Service Finance (FPS) has declared that domestic digital currency transactions are exempt from VAT. The FPS’s reasoning was predicated on the view that Bitcoin was not “a legal means of payment” and therefore could not be subject to VAT. It appears, however, that they may revise their ruling in the future.
The UK were yet more emphatic, declaring digital currency transactions to be VAT exempt. This is not the first pro-Bitcoin move that the UK has made recently. Earlier this year, Chancellor Osborne voiced his eagerness to make the UK a Bitcoin hub. Importantly, though, the VAT exemption declared by HMRC (Her Majesty’s Revenue and Customs) will not apply to transactions in which merchants provide goods and services in exchange for Bitcoins. The exemption will only apply to the fees charged on bitcoin-trading transactions.
Other member states have adopted more conservative positions. Poland now charges a rate of 23% on bitcoin trades. The director of the tax authorities reasoned that the sale of mined bitcoins was the provision of a service. And given that VAT Law applies to the sale of goods and services, the sale of mined bitcoins would be subject to VAT. In Estonia, adopting a position in diametric opposition to that of Finland, the authorities did not regard the provision of alternative payment instruments as an exempt financial service.
Article 135(1) of the EU VAT Directive exempts financial services from VAT throughout the EU. Hence, for any given member state, the issue of whether bitcoin trading should be regarded as a “financial service” is a crucial one. If it is regarded as such by the relevant authority, then it will be VAT exempt. If it is regarded as merely “the provision of a good or service,” then it will be subject to VAT.
A Swedish national has recently asked the European Court of Justice (the “Supreme Court of the European Union”) for a “preliminary ruling” that could have wide-reaching ramifications for all EU member states. In the Preliminary Ruling Procedure , the ECJ provides an authoritative and final interpretation of EU Law. The final decision in the case in question is, however, left to the referring court (in this case, Sweden’s Supreme Court). Thus, the law may be interpreted in favor of the complainant, but the complainant may still be deemed to lose by the referring court. This procedure is designed to ensure consistency in the way that EU law applies across EU Member States.
Sweden is a leading “bitcoin economy”. Mr David Hedqvist has asked for a preliminary ruling from the ECJ (Case C-264/14 ). The proprietor of Bitcoin.se has been fighting the Swedish tax agency Sattkevert on the question of whether the services his business provides should be subject to VAT. He is seeking clarification on the question of whether the exchange of virtual currency for traditional currency (and vice-versa) constitutes a service effected for consideration as per Article 2(1) of the Vat Directive and, if so, whether such a service is tax exempt as per Article 135(1). Should the court find it to be a financial service, this will constitute an authoritative ruling in all EU Member States, and all exchanges providing like services will be deemed VAT exempt throughout the EU.
Disclaimer: The author owns a small amount of bitcoin, litecoin and ripple.
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