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CVA comments on the recently published SFTA working paper on cryptocurrencies and ICOs

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By the Tax/Accounting/Structuring Working Group

On 27 August 2019, the Swiss Federal Tax Administration (SFTA) has published a working paper on cryptocurrencies and ICOs/ITOs in relation to respective wealth, income and profit tax, withholding tax and stamp duty considerations. The working paper can be downloaded here (German).

 

This publication follows up with previous publications by the SFTA on the Swiss VAT guidance for supplies involving cryptocurrencies & ICOs in June 2019 as well as the accounting guidelines published by EXPERTsuisse for utility tokens and asset tokens. 

The position shared within this working paper is based on the practice maintained by the SFTA to date and therefore represents a snapshot of the transactions submitted to the SFTA by end of May 2019. Further, the token categorization is aligned to the guidance published by FINMA on 16 February 2018. Having said that, it must be assumed that there are still open questions in respect of particular transaction circumstances which require conclusive answers and constitute “work in progress”. 

The CVA Working Group Tax / Accounting / Structuring (CVA WG TAS) appreciates the systematic efforts of the SFTA shared within this working paper as it helps to further provide transparency on the current tax practices. However, the working paper contains several gaps, assumes very specific, non-generic facts and circumstances and in turn, leaves a lot of blank spots. This asks for further clarifications.  

In order to provide the community with our perspective on this working paper, we as the CVA WG TAS gladly share below respective comments prepared by Thomas Linder / MME.  

 

SYSTEMATICS

The SFTA distinguishes between Native / Payment Tokens without legal claim, Asset-backed Tokens with a contractual claim to repayment or cash payment and Utility Tokens with a contractual claim to use a digital service. In the case of Asset-backed Tokens, a distinction is also made between Debt, Equity and Participation Tokens, although all (digital) participation rights under company law are expressly excluded from these definitions.

It is thus based on FINMA’s token triad of Payment, Asset and Utility Tokens. However, its ICO Guidelines from February 2018 are a purely purpose-oriented, regulatory classification in which the Anti-Money Laundering Act (payment/means of payment), the securities regulations (asset/investments, above all also participation rights under company law) and a category without financial regulations (utility/usage) are represented. Therefore, the use of similar terms is more confusing than clarifying. The same can also be said of the practical notices issued by the VAT authorities in this area, which also use different definitions. A more comprehensive, cross-agency system would have been more effective and easier to understand.

 

WEALTH TAX

It is also astonishing that the SFTA also takes a stand on the cantonal wealth tax and influences the (cantonal) valuation of digital assets with its price lists. In our opinion, the specification of tax values without an objectively ascertainable market value (e.g. on a regulated stock exchange) is definitely not within the competence of the SFTA and is questionable both formally and in terms of content. The proposed valuation of highly volatile assets on the reporting date would then hardly correspond to the long-term realizable, taxable market value. It is significant, however, that the cantons largely comply with these conditions without any discernible resistance.

 

INCOME TAX

Certain issues, such as the valuation of wage payments in the form of tokens or the distinction between private asset management and self-employment, are forced into certain ( wanted ) forms without a thorough examination of the facts. For example, an “analogous application of the criteria according to Circular No. 36 on commercial securities trading” to native tokens makes no sense at all, since these are to be treated as transactions with conventional means of payment (currencies) and are therefore not securities. In practice, however, the differences between securities and currency trading are so immanent that “analogous application” is diametrically opposed to the content and purpose of KS 36.

 

WITHHOLDING TAX

In principle, the token types described by the SFTA are not subject to withholding tax due to the lack of a legal basis. This is to be welcomed.

However, the FTA reserves the right to levy withholding tax “if the two following cumulative thresholds are not met:

  • The shareholders of the issuer may hold a maximum of 50% of the issued token at the time of the respective due date. 
  • The defined profit participation quota must result in payments to the token holders not exceeding 50% of the EBIT.”

Unfortunately, this provision is worded in a cumbersome manner and leaves open whether the “safe haven” is violated if both or only if one of the thresholds is not met.

At this point, we would also like to refer to the general rules concerning hidden profit distributions. These are payments to shareholders or to related third parties who have their legal basis exclusively in the ownership relationship and are not openly disclosed as such in the accounts. An obvious, recognizable disproportion between performance and consideration is assumed. A contractual payment to shareholders, which is also made to unrelated third parties under the same conditions, can, therefore in our opinion, hardly qualify as a hidden distribution of profits. The thresholds mentioned can be used as indications. However, the fulfilment of the other requirements is absolutely necessary for the existence of a hidden distribution of profits.

 

STAMP DUTIES

It is correct that the token categories mentioned are not subject to securities transfer tax, even in the case of transactions via securities dealers, provided that they do not refer to taxable securities within the meaning of the Stamp Duties Act.

 

The CVA WG TAS will keep you up-to-date in respect of any upcoming developments in this respect. Stay tuned!

 

CVA Initiative Regarding FATF Guidance for Virtual Assets

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The Financial Action Task Force (FATF) has recently updated its Guidance on the treatment of Virtual Assets (VA) and Virtual Asset Service Providers (VASP), which lays out due diligence measures that must be implemented to prevent money laundering and terrorism financing.

The Crypto Valley Association (CVA) recognizes that this new Guidance presents significant challenges to members who may issue or deal in VAs and who may be classified as VASPs (defined below).

With this in mind, the CVA will be conducting one or more information session(s) in the upcoming months in order to inform members and the DLT community of requirements and possible solutions regarding compliance with the new Guidance, which will soon be reflected in domestic regulations.The CVA will equally liaise with relevant authorities and counterparts in Switzerland and abroad to support the implementation of the Guidance.

What is a VASP?

Virtual Asset Service Provider (VASP) means any natural or legal person who conducts one or more of the following activities for or on behalf of another natural or legal person:

  • exchange between virtual assets and fiat currencies;
  • exchange between one or more forms of virtual assets;
  • transfer of virtual assets;
  • safekeeping and/or administration of virtual assets or instruments enabling control over virtual assets (i.e. custody / custodial wallet solutions); and
  • participation in and provision of financial services related to an issuer’s offer and/or sale of a virtual asset (i.e. initial token or crypto offering).

The new FATF guidance includes recommendations on several key points, including;

1. VASPs must join the fight against money laundering / terrorism finanicing

Exchanges, crypto banks, issuers of payment tokens and the like will need to be licensed and implement a program to manage AML/CTF (identify and verify the authenticity of clients, monitor transactions, etc.) for transactions above USD 1,000.

2. Travel rule

VA transfers that take place between a VASP and other financial intermediates (i.e. other VASP, banks) will require the originating party (ie. sender) to obtain, hold and transmit required information on both the sender & recipient, including names, residential and wallet addresses. Similar requirements are placed on receiving / beneficiary VASPs.

3. SRO

VASPs should be supervised or monitored by a competent authority, not a self-regulatory body. FINMA-licensed SROs should be considered competent authorities in Switzerland.

Note: During the process of refining its Guidance (first issued in 2015), the CVA’s Regulatory and Policy Working Group provided input to the FATF, with consideration to the needs and experience of Crypto Valley companies and the industry as a whole.

Read the CVA’s submission to the FATF.

The CVA encourages all of its members to join in the conversation and attend the information  sessions – and be prepared to follow developments in the space with careful attention.

 

CVA Contribution to Consultation on Framework Conditions for Blockchain/DLT

By | Articles, Policy / Regulations

The Swiss State Secretariat for International Finance (SIF) recently closed a round of public consultations aimed at gathering input on the possible framework improvements to for DLT and blockchain.

As with previous such consultations, the Crypto Valley Association was active in gathering input and providing an opinion paper to the SIF, in particular with the support of the CVA’s Regulatory and Policy Working Group chaired by Thomas Stoltz and Tobias Kallenbach.

Read the CVA’s Position Paper here.

EXPERTsuisse issues Swiss ICO accounting guidelines for asset tokens

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Author: Markus Vogel, Chair CVA Tax / Accounting / Structuring Working Group and Tax Partner at KPMG Switzerland

After the release of the Q&A on special accounting topics last December 2018 (Accounting of ICO’s with Utility Tokens), EXPERTsuisse in collaboration with CVA’s Working Group for Tax and Accounting has further clarified the Swiss accounting guidelines for asset token ICOs. The accounting guidelines for asset token ICOs have been jointly published by the EXPERTsuisse with the Crypto Valley Association. This reinforces the commitment of the leading institution in the Swiss accounting landscape to further clarify the accounting treatment of crypto transactions.

EXPERTsuisse, the Swiss Expert Association for audit, tax and fiduciary practitioners, has mandated its Accounting Standards Committee to establish the Swiss ICO accounting guidelines for asset tokens in close collaboration with the CVA Working Group Tax / Accounting / Structuring. The result of this continued great collaboration can be accessed below and also contains:

  • Additional clarifying statements in respect of the Swiss accounting guidelines for utility token ICOs which have been published in December 2018:
    • Treatment of genesis block generation in light of a subsequent token sale;
    • Swiss foundations as token issuing entities,
    • Treatment of capital gains and losses in cryptocurrency holdings raised through an ICO;
    • Treatment of development of proprietary blockchain protocols.
  • The accounting principles applicable to cryptocurrencies such as Bitcoin.

Read the guidelines – in German / in French.

What are the new guidelines?

The new accounting guidelines detail the accounting treatment of so-called asset tokens. Asset tokens generally represent any kind of tokenised asset which carry either an ownership right in respect of an asset or company resp. a relative right regarding future profits or cash flows.

Within these accounting guidelines, the accounting treatment is illustrated at hand of two distinct case studies. The first case study represents the issuance of the IMMO Coins which are legally structured as participation certificates (Partizipationsschein) for the financing of real estate acquisitions. The accounting treatment at hand does not materially deviate from the one applied to the issuance of non-tokenised participation certificates.

The second case study – “ROB” – entails the issuance of ROB Coins in the context of the pre-financing of the development and marketing of a robot. In exchange for this pre-financing, the token purchasers acquire the right to a 10%-revenue participation in the issuing company. The accounting treatment closely follows the same analogy as used for the utility token of the advance payment without any repayment obligation.

At the case at hand, there are two factual obligations borne by the ICO company: i) a development obligation of a robot as well as ii) a marketing obligation of the robot. Hence, the respective ICO company has the implicit order from the token purchasers to put sincere efforts into the development and marketing of the robot. These efforts are considered to be financed at hand of so-called advance payments without repayment obligations.

Any product development expense directly attributable to the ICO project can be deducted from the received advance payments (without repayment obligations). Further on, if there is still an excess amount of advance payments (without repayment obligations) after the completion of the product development stage of the robot, any relevant marketing expense for the robot can be deducted from this liability until it’s fully absorbed.

Final remarks

As outlined in the beginning, the publication of the Swiss ICO accounting guidelines for asset tokens confirms the commitment of leading accounting institution in Switzerland to further improve the local conditions for crypto businesses. The CVA Tax / Accounting / Structuring Working Group maintains close ties to EXPERTsuisse and will inform you in due time about the planned meet-up activity relating to these new accounting guidelines.