The increasing popularity of blockchain and its adoption by mainstream industry has focused international attention on the tax treatment of cryptocurrencies, app tokens, initial coin offerings (‘ICOs’) and crypto investment funds.
The Netherlands is one of Europe’s most progressive nations with regard to the blockchain and has already developed extensive tax legislation to cope with these new concepts. The Dutch tax treatment of cryptocurrency for Dutch personal income tax (PIT) is complex and this article also considers the implications for corporate income tax (CIT) and value added tax (VAT).
Cryptocurrency is generally divided into categories, with a dis- tinction made on the characteristics of the cryptocurrency and its representation. It can take the form of an asset token such as a debt or equity claim, a utility token providing access to a digital or other service, or a payment token (such as bitcoin or ether), which can be used as a virtual currency.Dutch taxation of a cryptocurrency can differ dependent on these characteristics, but the monies owed can only be paid in fiat money (Euro) and not in any cryptocurrency.
Personal Income Tax (PIT)
Dutch tax residents are taxed in one of three ways:
• Income from employment or a business;
• Income from (substantial) shareholdings of 5 per cent or more;
• Income from passive investments and savings.
When a Dutch resident holds cryptocurrency, this will gener- ally constitute income from passive investments. The deemed income ranges from 2.87 per cent to 5.39 per cent of the value of those passive assets and will be taxed at a rate of 30 per cent. However, under certain conditions, the cryptocurrency can be treated as income from employment or business, in which case the income and gains from the cryptocurrency will be taxed at progressive rates, with a maximum of 52 per cent.
This distinction between sorts of income depends on the source of income. To qualify as income from business, eco- nomic benefits need to be demonstrated. For example, if the holder of the cryptocurrencies performs activities that have a direct influence on the value of the cryptocurrency.
An example might apply to a utility token, if the holder of the cryptocurrency token also developed the user app, then the asset may be seen as income from employment.
Corporate Income Tax (CIT)
Dutch limited liability companies are subject to Dutch CIT at the rate of 20 to 25 per cent of worldwide income, whereas Dutch foundations (Stichtingen) which do not carry out business are, generally, not subject to Dutch CIT. A common initial coin offering (ICO) structure used in The Netherlands, employs a foundation to act as the ICO company and finance the funding needs of the operating entity, which would be a Dutch limited liability company (OpCo).
The financial relationship between the ICO company and the OpCo will mainly be for the prepayment of services or debt funding, as opposed to an equity participation in the operat- ing company. The funding received from the ICO company should therefore not generate a direct Dutch CIT liability. The same would apply to the issuance of payment tokens.
The issuance of assets tokens may be seen as a sale of the underlying asset, which could result in corporate income tax for the ‘deemed’ seller of the asset that has been tokenised. Any other income generated by the OpCo, such as from the provision of services to other parties other than token holders, or profits from tokens held in deposit, is subject to Dutch CIT.
The VAT treatment of cryptocurrencies is more difficult to clarify and will depend on the characteristics of the cryptocur- rency. In relation to the crypto currency itself, and the mining thereof, it is still not clear whether these should be considered as economic activities for VAT purposes, falling within the scope of VAT legislation.
When analysing the letter of the law of art. 135 paragraph 1 under d, e and f of the VAT Directive, we can state that the current framework does not yet offer enough support to include certain activities regarding cryptocurrencies within the scope of VAT exemptions.
The current opinion of the Court of Justice of the European Union is that no VAT is payable on the sale of bitcoins (pay- ment tokens). The bitcoin is not seen as money, but has the same function (i.e. means of payment), and therefore any revenue arising from their issuance falls without the scope of the VAT.
Regarding utility tokens and asset tokens, no practical guide- lines have been rendered. Hypothetically, utility tokens could qualify as compensation or the advance payment of a service which would result in being subject to VAT. Asset tokens could be exempt from tax if the underlying asset is exempt from VAT, but if that asset is subject to VAT so should the asset token be.
This article is taken from the recent IR Digital doucment: IR GLOBAL - MEET THE MEMBERS: The Netherlands.