VATupdate

Flashback on ECJ Cases C-264/14 (Hedqvist) – Buying and selling Bitcoin is exempt from VAT

On October 22, 2015, the Court of Justice of the European Union (CJEU) rendered its judgment in the case of Skatteverket v. Hedqvist. In this important decision the CJEU sheds light on the value added tax (VAT) aspects of the use of bitcoins.


Article in the EU VAT Directive

Article 2(1) and 135(1) of the EU VAT Directive 2006/112/EC

Article 2 (Taxable transaction)
1. The following transactions shall be subject to VAT:
(a) the supply of goods for consideration within the territory of a Member State by a taxable person acting as such;
(b) the intra-Community acquisition of goods for consideration within the territory of a Member State by:
(i) a taxable person acting as such, or a non-taxable legal person, where the vendor is a taxable person acting as such who is not eligible for the exemption
for small enterprises provided for in Articles 282 to 292 and who is not covered by Articles 33 or 36;
(ii) in the case of new means of transport, a taxable person, or a non-taxable legal person, whose other acquisitions are not subject to VAT pursuant to Article 3(1), or any other non-taxable person;
(iii) in the case of products subject to excise duty, where the excise duty on the intra-Community acquisition is chargeable, pursuant to Directive 92/12/EEC,
within the territory of the Member State, a taxable person, or a non-taxable legal person, whose other acquisitions are not subject to VAT pursuant to Article 3(1);
(c) the supply of services for consideration within the territory of a Member State by a taxable person acting as such;
(d) the importation of goods.

Article 135 (Exemption)
1. Member States shall exempt the following transactions:
(a) insurance and reinsurance transactions, including related services performed by insurance brokers and insurance agents;
(b) the granting and the negotiation of credit and the management of credit by the person granting it;
(c) the negotiation of or any dealings in credit guarantees or any other security for money and the management of credit guarantees by the person who is granting the credit;
(d) transactions, including negotiation, concerning deposit and current accounts, payments, transfers, debts, cheques and other negotiable instruments, but
excluding debt collection;
(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;
(f) transactions, including negotiation but not management or safekeeping, in shares, interests in companies or associations, debentures and other securities, but excluding documents establishing title to goods, and the rights or securities referred to in Article 15(2);
(g) the management of special investment funds as defined by Member States;
(h) the supply at face value of postage stamps valid for use for postal services within their respective territory, fiscal stamps and other similar stamps;


Facts

  • Mr Hedqvist wishes to provide, through a company, services consisting of the exchange of traditional currency for the ‘bitcoin’ virtual currency and vice versa.
  • According to the order for reference the ‘bitcoin’ virtual currency is used, principally, for payments made between private individuals via the internet and in certain online shops that accept the currency. The virtual currency does not have a single issuer and instead is created directly in a network by a special algorithm. The system for the ‘bitcoin’ virtual currency allows anonymous ownership and the transfer of ‘bitcoin’ amounts within the network by users who have ‘bitcoin’ addresses. A ‘bitcoin’ address may be compared to a bank account number.
  • Referring to a 2012 report by the European Central Bank on virtual currencies, the referring court states that a virtual currency can be defined as a type of unregulated, digital money, which is issued and controlled by its developers and accepted by members of a specific virtual community. The ‘bitcoin’ virtual currency is one of the virtual currency schemes with ‘bidirectional flow’, which users can purchase and sell on the basis of an exchange rate. Such virtual currencies are analogous to other convertible currencies as regards their use in the real world. They allow both real and virtual goods and services to be purchased. Virtual currencies differ from electronic money, as defined in Directive 2009/110/EC of the European Parliament and the Council of 16 September 2009 on the taking up, pursuit and prudential supervision of the business of electronic money institutions amending Directives 2005/60/EC and 2006/48/EC and repealing Directive 2000/46/EC (OJ 2009 L 267, p. 7), in so far as, unlike that money, for virtual currencies the funds are not expressed in traditional accounting units, such as in euro, but in virtual accounting units, such as the ‘bitcoin’.
  • The referring court states that the transactions envisaged by Mr Hedqvist would be carried out electronically via the company’s website. That company would purchase units of the ‘bitcoin’ virtual currency directly from private individuals and companies, or from an international exchange site. The company would then resell the units on such an exchange site, or store them. Mr Hedqvist’s company would also sell such units to private individuals or to companies that place an order on its website. In a situation where the client has accepted the price in Swedish Crowns offered by Mr Hedqvist’s company and a payment has been received, the sold units of the ‘bitcoin’ virtual currency would be sent automatically to the ‘bitcoin’ address indicated. The ‘bitcoin’ virtual currency units sold by the company would either be those that it would purchase directly on the exchange site after the client had placed his order, or those that the company already had in stock. The price proposed by the company to clients would be based on the current price on a particular exchange site, to which a certain percentage would be added. The difference between the purchase price and the sale price would constitute Mr Hedqvist’s company’s earnings. The company would not charge any other fees.
  • The transactions that Mr Hedqvist intends to carry out are thus limited to the purchase and sale of ‘bitcoin’ virtual currency units in exchange for traditional currencies, such as the Swedish crown, or vice versa. It is not apparent from the order for reference that those transactions would include payments made using ‘bitcoin’.
  • Before starting to carry out such transactions, Mr Hedqvist requested a preliminary decision from the Revenue Law Commission in order to establish whether VAT must be paid on the purchase and sale of ‘bitcoin’ virtual currency units.
  • In a decision of 14 October 2013, the Revenue Law Commission found, on the basis of the judgment in First National Bank of Chicago (C‑172/96, EU:C:1998:354), that Mr Hedqvist would be supplying an exchange service effected for consideration. The Revenue Law Commission held, however, that the exchange service was covered by the exemption under Chapter 3, Paragraph 9, of the Law on VAT.
  • According to the Revenue Law Commission, the ‘bitcoin’ virtual currency is a means of payment used in a similar way to legal means of payment. Furthermore, the term ‘legal tender’ referred to in Article 135(1)(e) of the VAT Directive is used in order to restrict the scope of the exemption as regards bank notes and coins. It follows, according to the Revenue Law Commission, that that term must be taken to mean that it relates only to bank notes and coins and not to currencies. That interpretation is also consistent with the objective of the exemptions laid down in Article 135(1)(b) to (g) of the VAT Directive, namely to avoid the difficulties involved in making financial services subject to VAT.

Questions

Is Article 2(1) of the VAT Directive to be interpreted as meaning that transactions in the form of what has been designated as the exchange of virtual currency for traditional currency and vice versa, which is effected for consideration added by the supplier when the exchange rates are determined, constitute the supply of a service effected for consideration?

If the answer to the first question is in the affirmative, is Article 135(1) to be interpreted as meaning that the abovementioned exchange transactions are tax exempt?


AG Opinion

(1)      The exchange of a pure means of payment for legal tender and vice versa, which is effected for consideration included by the supplier when the exchange rates are determined, constitutes the supply of a service effected for consideration within the meaning of Article 2(1)(c) of Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax.

(2)      Such transactions are exempt from VAT under Article 135(1)(e) of Directive 2006/112.


Decision

1.      Article 2(1)(c) of Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax must be interpreted as meaning that transactions such as those at issue in the main proceedings, which consist of the exchange of traditional currency for units of the ‘bitcoin’ virtual currency and vice versa, in return for payment of a sum equal to the difference between, on the one hand, the price paid by the operator to purchase the currency and, on the other hand, the price at which he sells that currency to his clients, constitute the supply of services for consideration within the meaning of that article.

2.      Article 135(1)(e) of Directive 2006/112 must be interpreted as meaning that the supply of services such as those at issue in the main proceedings, which consist of the exchange of traditional currencies for units of the ‘bitcoin’ virtual currency and vice versa, performed in return for payment of a sum equal to the difference between, on the one hand, the price paid by the operator to purchase the currency and, on the other hand, the price at which he sells that currency to his clients, are transactions exempt from VAT, within the meaning of that provision.

Article 135(1)(d) and (f) of Directive 2006/112 must be interpreted as meaning that such a supply of services does not fall within the scope of application of those provisions.


Summary

The exchange of traditional currencies for units of the virtual currency bitcoin and vice versa, against payment of an amount corresponding to the margin resulting from the difference between the price at which the relevant market participant buys the currencies and the price at which he sells them to his customers, constitutes a service for consideration.

The exchange of traditional currencies against units of the virtual currency bitcoin and vice versa, carried out against payment of an amount corresponding to the margin resulting from the difference between the price at which the relevant market participant buys the currency and the price at which he sells it to his customers, constitutes a VAT-exempt transaction.


Source


 

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