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Bitcoin is a little closer to be VAT exempted in Europe.

Last thursday, the Advocate General, Ms. Julianne Kokott, submitted her conclusions before the European Court of Justice (hereinafter, ECJ), in case C-264/14, in which she explained how Bitcoin exchanges (for fiat currency) should be taxed according to VAT regulation, in her opinion.

This issue arises from a preliminary ruling submitted before the ECJ by the Swedish Supreme Court (Högsta Förvaltningsdomstolen) with the main purpose of clarifying, as previously mentioned, the taxation of Bitcoin exchange activities according to VAT regulation.

The questions raised were the following: (i) if the Bitcoin exchange should be considered as a supply of services within the meaning of the Directive 2006/112/EC (hereinafter, the "VAT Directive" or "the Directive") and if so, (ii) if those transactions should be exempted under the article 135.1 of the Directive (regarding the exemption applicable for financial transactions).

We have been waiting for a long time for a clarification issued by the ECJ related to the application of the VAT exemption for Bitcoin transactions. Hence, we are now much closer to this. In my opinion, the most important matter behind this issue is that if the ECJ agree with the arguments of the Advocate General, judgement would be binding for every Member State of the European Union, including those contries which stated the contrary (Estonia and Poland).

Nervertheless, we have seen how several countries of the EU have stated that the exemption must be applied (among others, United KingdomBelgiumSpain, Finland or Switzerland.

The most interesting part of the conclusions is that the Advocate General said that, even if Bitcoin is not a legal mean of payment, it shall be deemed as a "pure" mean of payment ("Auch Bitcoins stellen nach den Feststellungen des vorlegenden Gerichts ein reines Zahlungsmittel dar"), given that it fullfills the intended purpose of legal means of payment.

Hereafter, we are going to explain the arguments used by the General Advocate in order to answer the two referred questions:

  • If Bitcoins exchange activities are subject to VAT and if so;
  • If those activities should be VAT exempted.

VAT Liability for Bitcoin Exchange Activities

Please note that an activity could be subject to VAT (it means that VAT regulations applies to the referred activity) but exempted (it means that there is no obligation of payment according to certain exemptions listed in the VAT regulation) or, on the contrary, that activity could be not subject to VAT (this means that the VAT regulation does not apply to the referred activities).

The arguments are based on a judgment of the ECJ Case First National Bank of Chicago-, which highlights that the transmission of legal means of payment does not imply VAT liability. Nevertheless, the abovementioned judgment considers that this kind of activities are taxable (regarding VAT) when there are different exchange rates applied to the sale and the purchase of the currencies (this is exactly how a Bitcoin Exchange operates).

It is also interesting that the Advocate General states that if certain regulation applies to legal means of payments, it should apply to other means of payment whose purpose (the payment) ends in itself (this means that those means of payment cannot be used for anything different from serve as a mean of payment).

The bitcoins, called "pure" means of payment by the Advocate General, serve to the same purpose than legal means of payment for VAT purposes, under the opinion of Ms. Kokott. That said, under the principle of tax neutrality, legal means of payments and pure means of payment should be treated in the same way for VAT purposes.

In conclusion, we should distinguish two possible scenarios:

  1. An exchange of bitcoins for fiat currencies (and vice versa) applying different exchange rates for sales and purchases. In that case, that activity shall be deemed as a supply of services and should be considered VAT liable, but exempt (as we will explaing in the following paragraphs).
  2.  A simple Bitcoin transaction with no charges for the exchange. In this scenario, in accordance with the abovementioned, there is no VAT liability.

Exemption

As we previously mentioned, Bitcoin exchange activities is VAT liable. However, the VAT Directive states a list of exemptions applicable to financial transactions.

In this regard, Ms. Kokott analyses if the service of Bitcoin exchange could be covered by the exemptions included in the VAT Directive for financial transactions. In particular, the Advocate General considers the points d), e) and f) of the article 135.1 of the Directive, applicable for negotiable instruments, transactions with "legal tenders" and securities, respectively. In the end, she concludes that the exemption that should apply is the one stated in the point e), related to means of payment.

 Transactions with legal tender

"e) 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";

In particular, this exemption requires a connection with legal tenders.  However, given that the European Directives are enacted in different languages, there are differences between those versions. In this context, it is difficult to determine if the exemption just apply to legal tenders (like in the English version) or other means of payment and currencies.

  • English version: These version uses the terms "currency, bank notes and coins". Consequently, in this version, any kind of money and means of payment would be covered, not just foreign legal tenders.
  • German Version: This one uses the term "Devisen […], die gesetzliches Zahlungsmittel sind". The abovementioned means that the exemption applies just for legal tenders.
  • Spanish Version: Uses the term "medios legales de pago" (legal tender).
  • Finnish Version: This one uses a large concept of mean of payment, including any currency (like Bitcoin). Consequently, Bitcoin should be VAT exempted according to this version.
  • Italian Version: According to this version, transactions related to means of payment with “discharging effects” (“con valore liberatiorio”). Therefore, given that this version does not use the term “legal tender” (“de corso legale”). Consequently, Bitcoin exchange activities should VAT exempted under this translation too.

As we may note, there are substantial differences between those versions of the Directive. Hence, the Advocate General states that this issue should be solved according to the main purpose of the exemption. In this sense, it should be determined if exchange activities of non-legal means of payment (but considered pure means of payment) should be exempted under the Directive.

Up until now, we have not seen any ruling submitted by the ECJ regarding this particular exemption. Therefore, the Advocate General give us her opinion:

"The main purpose of any VAT exemption is the reduction of costs of the transaction. In the current situation, the transaction consists on a supply of services related to pure means of payment. The main purpose of the exemption of the financial transactions related to means of payment/legal tender, under my opinion, is not to obstruct the convertibility of the pure means of payment with their VAT taxation. This is also important for the internal market, given that if a border provision of services need a currency exchange, the VAT taxation related to that services would be unnecessarily more expensive than imports”.

But this exemption is not limited to European legal tenders: every legal tender in the world is exempted under the VAT regulation. Consequently, we can confirm that the main purpose of the article 135.1 e) of the Directive is to permit that every legal tender/mean of payment could be converted at the lowest possible cost, for the stake of a smooth payment circulation.

According to the above, the activity of exchange legal tender for pure means of payment should be VAT exempted. Indeed, if there are means of payment which serve the same purpose as legal tender, the VAT taxation for this exchange would imply an additional charge to the payment circulation”.

The abovementioned means the following: Even if Bitcoin is not a legal tender, it is used in the course of trade with the same role as legal tenders. Consequently, taxing (referring to VAT) those transactions would imply unjustified additional charges.

This argument should be understood according to the principle of tax neutrality, which states the following: Two identical situations should be taxed in the same way. Accordingly, in order to justify a different treatment, those situations should have substantial differences. In this context, as the Advocate General explains, there are no substantial differences between the exchange of legal tenders and the exchange of "pure" means of payment.

Thinking back, considering the main purpose of the exemption and that Bitcoin serves the same purpose of legal tenders, it should be understood that Bitcoin exchange activities should be VAT liable but exempt. On the other hand, Bitcoin transactions, in general, are no subject to VAT regulation.

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