EU – Advocate General Opinion – Bitcoin dealing VAT-free as currency exchange?

ECJ Advocate General Kokott has recommended the Court to consider dealing in bitcoins for a commission to be a service exempt from VAT under the currency dealing provision (link – to the German version of the opinion. In English it is not yet available) .

A Swedish dealer in bitcoins (buying and selling bitcoins in exchange for Swedish kroner) was in dispute with the tax office over the VAT liability on the currency exchange. He maintained that he was providing a VAT exempt service of currency exchange, whereas the tax office disputed the point because bitcoins are not legal tender. It was also pointed out that bitcoins are not subject to any form of government supervision or control and offer no guarantee of continued usefulness to the holder.

The ECJ Advocate General on the case has nonetheless suggested the court to rule that the exchange be seen as a service within the meaning of the VAT Directive, but exempt from VAT as a currency exchange. Her main point is that bitcoins are a means of payment and fulfil the same function as legal tender insofar as the parties to a given transaction are prepared to accept them in settlement of the debt. She also points out that the condition that the currency dealt in must necessarily be legal tender is not clear from the directive’s text in every language. If bitcoins can be used in payment, insistence that their exchange for another currency be subject to VAT would destroy the neutrality of the system as there would be no reason to treat the two means of payment differently. Arguments based on currency risk are, she feels, irrelevant, as the attribute of legal tender does not remove the risk from a currency. In any case currency risks are a matter for supervision authorities, but not for the VAT system. As she put it, even if a transaction were prohibited, it would still be subject to VAT.

The opinion, if followed by the Court, would recognise bitcoins as legitimate currency, meaning that conversions between it and other currencies would be VAT-exempt.

However, even if followed by the Court, it remains to be seen which legal basis it will use: Article 135(1)(e) as suggested by the Advocate General, or Article 15(1)(d) which is the position of EU Member States such as Belgium or the UK.

The ECJ case reference is C- 264/14 Hedqvist opinion of July 16, 2015.

Note 1: The opinion of the Advocate General to consider the bitcoin dealings as VAT-exempt is more or less in line with the current position of the Belgian VAT administration as outlined in a Parliamentary Questions that is publicly released. According to the Belgian VAT administration, the trading of bitcoins and other virtual currencies is similar to the activity of an intermediary negotiating in securities and other negotiable instruments and, as a consequence, is exempt from VAT under the Belgian VAT code provision implementing Article 135(1)(d) of the EU VAT Directive (and not Article 135(1)(e) as suggested by the Advocate General). As a result, the activities should be treated as exempt from VAT in Belgium and Bitcoin and alike trading platforms should not charge VAT to their customers with respect to their exchange services. On the other hand, those platforms have no right to deduct the Belgian input VAT paid in relation to their exchange activity.

Note 2: The AG opinion is interesting because it provides some preliminary insights at the European level on bitcoin taxation.  Currently in the EU, the VAT treatment of the trading with virtual currencies is not harmonised. One approach taken by countries like Belgium and the UK is to exempt these transaction from VAT. According to the other approach represented by Poland or Estonia, the trading of virtual currencies should be subject to VAT.

Also outside the EU, there is no unified approach. The Swiss Federal Tax Administration ruled in June that bitcoins are VAT-exempt, whereas  Australia’s tax authorities have ruled that bitcoins are not considered as “money” and hence bitcoin transaction are subject to GST. In Iceland, bitcoins and other virtual currency transactions are restricted to “mining” within the country.

About Sophie Claessens

Senior Tax Manager PricewaterhouseCoopers Tax Consultants Belgium email: Mobile: +32 473 91 05 67 Office: +32 3 259 3169

Sophie Claessens is an international VAT advisor, based in Antwerp, Belgium, with a particular focus on business-to-consumer industries, including telecommunications, media, internet and e-commerce. She supports major industry players on sector-specific issues, including VAT compliance at both an operations and strategic level, and is directly involved in policy work for businesses in these industries, both at the Belgian level and at the level of the European Commission. She is responsible for indirect taxes in the communications sector at PwC Belgium and is a driver of PwC's Business Working Group on the EU 2015 VAT changes. She has authored articles for publication in Belgian and international tax journals.