The Court of Justice of the European Union has ruled that the services of a Bitcoin exchange in exchanging Bitcoin for a traditional currency is exempt from VAT on the basis of the ‘currency’ exemption (Skatteverket v David Hedqvist Case C-264/14).
VAT is imposed across the European Union Member States. To date, there has been no consistency of approach within the EU. In some places Bitcoin is subject to VAT; in others it is exempt. In some states, there is no clarity as to how Bitcoin should be taxed. This decision changes that – it requires the Member States to exempt Bitcoin supplies from VAT.
The Court was asked to consider how an exchange which sold Bitcoin for traditional currencies would be taxed.
The case before the court concerned Mr Hedqvist who wished to set up a Bitcoin exchange. Before he did this he wanted clarity as to the VAT position of his new business. This led to the Swedish courts asking the European court for clarification. The importance of this decision to the Bitcoin community is well illustrated by the many contributions made to Mr Hedqvist’s legal costs.
Unsurprisingly this decision confirms that an exchange of Bitcoin for a traditional currency is a supply of services. The court (following the Advocate-General’s opinion) held that an exchange of Bitcoin fell within the exemption in Article 135(1)(e) of the VAT Directive. This exempts transactions ‘concerning currency, bank notes and coins used as legal tender’ from VAT.
Relevance to other virtual currencies
Whilst this decision is confined to the activities of a Bitcoin exchange, there seems to be no reason why it would not equally apply to other virtual currencies provided such currency has no purpose other than to be a means of payment.
Representations were made to the court that the ‘currency’ exemption should only apply where both currencies being exchanged are legal tender. There are differences in the relevant words in the VAT Directive between the different language versions. Given this linguistic uncertainty the court sought to interpret the words in the context it is used, and in light of the aims of the VAT Directive. Given that the only purpose of Bitcoin is as a means of payment, the court concluded that the ‘currency’ exemption should apply.
It is worth noting that legal tender is a surprisingly narrow concept. For example, Scottish currency is not legal tender. Despite this, the author is not aware of any arguments being raised that an exchange of say US dollars for Scottish pounds does not fall within the ‘currency’ exemption. It would seem strange if Bitcoin were treated differently to Scottish pounds.
Impact on location of Bitcoin exchange businesses
The impact of this decision on Bitcoin exchanges will depend upon who their customers are. Where a Bitcoin exchange transacts with other businesses, the right to levy VAT belongs to the state in which the counterparty (rather than the Bitcoin exchange) belongs. Where Bitcoin exchanges transact with non-businesses (for example, an individual), the state which has the right to impose VAT is where the Bitcoin exchange belongs.
It is key to the economics of running a Bitcoin exchange that sales taxes are minimised. As a result, where a Bitcoin exchange expects to transact with a significant number of non-businesses, this decision makes Europe look an attractive location to establish a Bitcoin exchange. Consideration will also need to be given to the expected location of the counterparties to consider the best way to manage any irrecoverable VAT costs resulting from supplies made to the Bitcoin exchange. Of course sales taxes are not the only factor in deciding where to locate – or even the only tax factor in deciding where to locate. Bitcoin exchanges will need to look at the wider picture in deciding where to base themselves, for example, the availability and cost of skilled personnel is critical.
The decision that supplies of Bitcoin should be exempt from VAT has been welcomed by the Bitcoin community. It provides an important degree of certainty and should help virtual currency exchanges set up in Europe, and may make Europe a more competitive location for exchanges.