A New Tax Decision Favors Blockchain Business

There will be generally be no new taxes — income tax, stamp tax, or otherwise — on distributed ledger technology businesses, Switzerland’s Federal Department of Finance (the “FDF”) ruled last month. In a prepared statement, the department explained that Switzerland’s existing value-added tax, or VAT, law already sufficiently covers activities involving digital ledger technology.

The indirect tax assessed through the VAT regime, has been one of the major concerns for Swiss-based digital assets companies. The ruling on October 22, 2015 by the Court of Justice of the European Union that the services of a Bitcoin exchange in exchanging Bitcoin for traditional (i.e., fiat) currency is exempt from VAT on the basis of the ‘currency’ exemption created the need for additional clarification.

The FDF’s decision is nothing short of a windfall for the crypto and blockchain industries. The upshot of the FDF’s recommendation is that income derived from equity or issuance of tokens almost certainly will not be subject to any special taxes in the near future. Rather, they will be taxed at a lower rate than generally applies to other assets in Switzerland.

Move Over New York: Make Way for Zug

As a result of this decision, we can expect Switzerland, already one of the top global centers for finance and FinTech, to become even more attractive to blockchain startups. Indeed, there are already more than 800 firms dedicated to blockchain headquartered in the country, according to CV VC Insights, a Swiss blockchain market research firm. Zug, a town about an hour outside of Zurich, has even taken on the nickname “Crypto Valley,” a reference to the dense concentration of blockchain startups headquartered in the area.

What these crypto startups are attracted to, in addition to the country’s low corporate and personal tax rates, is the country’s favorable regulatory climate for digital assets and blockchain-related activities. Even before this decision, the Swiss government had made it clear they are committed to creating a concrete legal and regulatory framework for the blockchain industry.

In 2018, the FDF declared its commitment to improving the country’s laws to support the blockchain industry, backing up that commitment with its release last November of a series of recommendations for amending civil and financial markets laws to “increase[e] legal certainty, remov[e] barriers for applications based on distributed ledger technology (DLT) and reduc[e] the risk of abuse.”

The Swiss government’s clear position stands in stark contrast to regulatory compliance uncertainty with respect to the digital assets and blockchain industry in the United States. Virtual currencies remain a highly controversial topic among lawmakers and monetary policy leaders in the U.S. The consensus among business leaders is when there is clarity in laws or regulations; there is generally a favorable environment for startups or investors.

Switzerland’s decision to not apply additional taxes to blockchain transactions or income means that companies issuing coins or tokens are increasingly likely to consider incorporating and conducting their business activities in Switzerland rather than the U.S.

But more generally, the decision serves as further confirmation for any company in the crypto assets space, whether it is involved in mining or exchanging or brokering cryptocurrencies, that Switzerland may be the place to establish a business entity if the cost and other operational considerations of running a business there is not prohibitive.

For Assistance Incorporating Your Blockchain-Based Business in Switzerland, the U.S. or Elsewhere, Turn to BPM

Given these developments, Switzerland should at least be considered in international tax structuring going forward. Of course, there are many other planning issues that have to be considered and other jurisdictions should be considered as well given the operations conducted within the corporate group of companies in different countries. Digital assets and blockchain companies should consider structuring its foreign operations to allow access to capital and consider the value chain in its operations. The United States still offers unparalleled access to capital markets, and, access to U.S. investors may outweigh the potential tax savings found in other jurisdictions. Contact us today to learn more.