In this month’s Chartered Accountants Tax Case Digest we look at a recent Court of Justice of the European Union (CJEU) case which examined the VAT treatment of bitcoin exchange. The CJEU ruled that bitcoin exchange transactions should be exempt from VAT.

The case concerns the tax status of exchange commissions and margins. The Swedish tax authorities had been approached for an advance decision on whether or not the exchange of bitcoin into Swedish Krona (and vice versa) should be considered as a taxable or VAT exempt activity.

In the USA, there have been some limited decisions involving criminal cases where bitcoin was viewed as money, for the purposes of money laundering offences. And just last month, the US Commodity Futures Trading Commission deemed bitcoin to be a commodity and closed down trading platform Coinflip in the process.

The CJEU decision means that all EU states will now have to comply with this ruling. Few member states had arrived at their own decisions on the VAT-status of Bitcoin. One of the first to do so was the UK. HMRC announced its provisional tax treatment of bitcoin and other cryptocurrencies in Brief 9 of 2014 effectively making bitcoin trading exempt from VAT. Although, HMRC’S view is that VAT should be charged on goods and services sold for bitcoin. This was followed by an announcement in March this year that the UK plans to regulate bitcoin.

Few member states have worked out how to interpret the VAT rules for cryptocurrencies. Belgium, Croatia, Cyprus, the Czech Republic, Greece, Hungary, Ireland and Italy are amongst those undecided. Nor do Latvia, Luxembourg, Malta, Portugal, Romania and Slovakia have any regulations.

Some other states lie at the opposite end of the spectrum, with firm rulings on the matter. Some have taken a directly opposing view to that of the CJEU. Estonia levies a 20% tax on those trading bitcoins as a service, a 10% tax is charged on profits from selling bitcoins. Poland imposes a 23% VAT on bitcoin mining profits.

The CJEU decision seems to squarely place bitcoin and similar digital currencies within the ambit of ‘financial transactions’. Could this case be a step towards the recognition of bitcoin as legal tender? And if so, where does bitcoin fit in the EU’s financial regulatory system?

Skatteverket v David Hedqvist [2015] CJEU C-264/14

Background

The case constituted a request for a preliminary ruling relating to the interpretation of Articles 2(1) and 135(1) of Council Directive 2006/112/EC on the common system of value added tax (‘the VAT Directive’). The request was made in proceedings between the Skatteverket (Swedish tax authority) and Mr Hedqvist concerning a preliminary decision on whether transactions to exchange a traditional currency for the ‘Bitcoin’ virtual currency or vice versa were subject to VAT.

Mr Hedqvist wishes to provide, through a company, services consisting of the exchange of traditional currency for the ‘bitcoin’ virtual currency and vice versa.

‘Bitcoin’ virtual currency is used, principally, for payments made between private individuals via the internet and in certain online shops that accept the currency. The virtual currency does not have a single issuer and instead is created directly in a network by a special algorithm. The system for the ‘bitcoin’ virtual currency allows anonymous ownership and the transfer of ‘bitcoin’ amounts within the network by users who have ‘bitcoin’ addresses. A ‘bitcoin’ address may be compared to a bank account number.

According to the referring court, a virtual currency can be defined as a type of unregulated, digital money issued and controlled by its developers and accepted by members of a specific virtual community. The ‘bitcoin’ virtual currency is one of the virtual currency schemes with ‘bidirectional flow’ i.e. users can buy and sell on the basis of an exchange rate. Such virtual currencies are analogous to other convertible currencies as regards their use in the real world.

The transactions envisaged would be carried out electronically via the company’s website. That company would purchase units of the ‘bitcoin’ virtual currency directly from private individuals and companies, or from an international exchange site. The company would then resell the units on such an exchange site, or store them. The company would also sell such units to private individuals or to companies that place an order on its website.

In a situation where the client has accepted the Swedish price offered by the company and a payment has been received, the sold units of the ‘bitcoin’ virtual currency would be sent automatically to the ‘bitcoin’ address indicated. The ‘bitcoin’ virtual currency units sold by the company would either be those that it would purchase directly on the exchange site after the client had placed his order, or those that the company already had in stock.

The price proposed by the company to clients would be based on the current price on a particular exchange site, to which a certain percentage would be added. The difference between the purchase price and the sale price would constitute the company’s earnings. The company would not charge any other fees. Thus the planned transactions are limited to the purchase and sale of ‘bitcoin’ virtual currency units in exchange for traditional currencies and vice versa.

Mr Hedqvist requested a preliminary decision from the Revenue Law Commission in order to establish whether VAT must be paid on the purchase and sale of ‘bitcoin’ virtual currency units.

The referring court considered it can be inferred from the judgment in First National Bank of Chicago (C-172/96) that transactions to exchange a virtual currency for a traditional currency and vice versa, in return for payment of a sum equal to the difference between the purchase price and the sale price, constitute the provision of services for consideration.

In such a case, the question arises whether the transactions are covered by one of the exemptions for financial services laid down in Article 135(1) of the VAT Directive. Having doubts as to whether one of those exemptions applies to such transactions, the Supreme Administrative Court decided to stay the proceedings and referred the following questions for a preliminary ruling:

‘1. Is Article 2(1) of the VAT Directive to be interpreted as meaning that transactions in the form of what has been described as the exchange of virtual currency for traditional currency and vice versa, which is effected for consideration added by the supplier when the exchange rates are determined, constitute the supply of a service effected for consideration?

2. If so, must Article 135(1) [of that directive] be interpreted as meaning that the such exchange transactions are tax exempt?’

Decision

The relevant EU VAT legislation was as follows

Article 2 of the VAT Directive provides:

‘1. The following transactions shall be subject to VAT:

1. the supply of goods for consideration within the territory of a Member State by a taxable person acting as such;

…

3. the supply of services for consideration within the territory of a Member State by a taxable person acting as such;

…’

4 Article 14(1) of that directive provides:

‘“Supply of goods” shall mean the transfer of the right to dispose of tangible property as owner.’

5 Article 24(1) of that directive is worded as follows:

‘“Supply of services” shall mean any transaction which does not constitute a supply of goods.’

6 Article 135 of the VAT Directive provides:

‘(1) Member States shall exempt the following transactions:

…

4. transactions, including negotiation, concerning deposit and current accounts, payments, transfers, debts, cheques and other negotiable instruments, but excluding debt collection;
5. 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;
6. transactions, including negotiation but not management or safekeeping, in shares, interests in companies or associations, debentures and other securities, but excluding documents establishing title to goods, and the rights or securities referred to in Article 15(2);

…’

Under Swedish law, VAT is to be paid to the State on supplies within the national territory of taxable goods or services effected by a taxable person acting as such. The law provides that bank notes and coins used as legal tender, with the exception of collectors’ items, for example gold, silver or other metal coins or bank notes which are not normally used as legal tender or which are of numismatic interest, are exempt from VAT.

Supplies of banking and financial services and transactions involving securities and similar transactions are exempt from tax. Banking and financial services do not include notarial activity, collection of invoices or administrative services relating to factoring or the leasing of storage facilities.

The first question

This question asks, in essence, whether Article 2(1)(c) of the VAT Directive must be interpreted as meaning that such transactions constitute the supply of services for consideration within the meaning of that article.

It must be held, first, that the ‘bitcoin’ virtual currency with bidirectional flow cannot be characterised as ‘tangible property’ within the meaning of Article 14 of the VAT Directive. The transactions do not fall within the concept of the ‘supply of goods’, laid down in Article 14 of the directive. In those circumstances, these transactions constitute the supply of services, within the meaning of Article 24 of the VAT Directive.

A supply of services is effected ‘for consideration’ within the meaning of Article 2(1)(c) of the VAT Directive, and is therefore subject to VAT, only if there is a direct link between the services supplied and the consideration received by the taxable person (Loyalty Management UK and Baxi Group, C-53/09 and C-55/09).

Such a direct link is established if there is a legal relationship between the provider of the service and the recipient pursuant to which there is reciprocal performance, the remuneration received by the provider of the service constituting the actual consideration given in return for the service supplied to the recipient (Le Rayon d’Or, C-151/13).

It is clear that there would be a bilateral legal relationship between the company and the other party to the contract in which the parties to the transaction would agree, reciprocally, to transfer amounts of a certain currency and receive the corresponding value in a virtual currency with bidirectional flow, or vice versa.

It is also clear that the company would be remunerated for supplying the service by a consideration equal to the margin that it would include in the calculation of the exchange rate at which it would be willing to sell and purchase the currencies concerned.

Therefore it must be held that the transactions constitute the supply of services for a consideration that has a direct link with the service provided, within the meaning of Article 2(1)(c) of the VAT Directive.

The second question

This question asks whether Article 135(1)(d) to (f) of the VAT Directive must be interpreted as meaning that the supply of services such as these are exempt from VAT.

The exemptions laid down in Article 135(1) of the VAT Directive constitute independent concepts of EU law whose purpose is to avoid divergences in the application of the VAT system as between one Member State and another.

As a result of established case-law the terms used to specify those exemptions are to be interpreted strictly, since they constitute exceptions to the general principle that VAT is to be levied on all services supplied for consideration by a taxable person.

The interpretation of those terms must be consistent with the objectives pursued by the exemptions laid down in Article 135(1) of the VAT Directive and comply with the requirements of the principle of fiscal neutrality inherent in the common system of VAT.

Thus, the requirement of strict interpretation does not mean that the terms used to specify the exemptions referred to in Article 135(1) must be construed in such a way as to deprive the exemptions of their effect.

Transactions exempt from VAT under those provisions are, by their nature, financial transactions even though they do not necessarily have to be carried out by banks or financial institutions.

According to the exemptions laid down in Article 135(1)(d) of the VAT Directive, Member States are to exempt transactions involving, ‘deposit and current accounts, payments, transfers, debts, cheques and other negotiable instruments’.

The ‘bitcoin’ virtual currency, being a contractual means of payment, cannot be regarded as a current account or a deposit account, a payment or a transfer. Moreover, unlike a debt, cheques and other negotiable instruments, the ‘bitcoin’ virtual currency is a direct means of payment between the operators that accept it.

Therefore, transactions such as those in the main proceedings do not fall within the scope of the exemptions provided for under that provision.

The exemptions laid down in Article 135(1)(e) of the VAT Directive provides that Member States are to exempt transactions involving, currency and bank notes and coins used as legal tender.

The exemptions laid down by Article 135(1)(e) of the VAT Directive are intended to alleviate the difficulties connected with determining the taxable amount and the amount of VAT deductible which arise in the context of the taxation of financial transactions.

Transactions involving non-traditional currencies, in so far as those currencies have been accepted by the parties to a transaction as an alternative to legal tender and have no purpose other than to be a means of payment, are financial transactions.

To interpret that provision as including only transactions involving traditional currencies would deprive it of part of its effect. It is common ground that the ‘bitcoin’ virtual currency has no other purpose than to be a means of payment and that it is accepted for that purpose by certain operators.

Consequently, it must be held that Article 135(1)(e) of the VAT Directive also covers the supply of these services which are thus exempt.

The full judgment in this case is available from:- http://curia.europa.eu/