Paper – VAT Goes Virtual: Security Tokens

Paper written by Joachim English

The paper presents a short analysis of the EU VAT implications of security tokens, i.e. tradeable financial instruments that are issued, stored and transferred using distributed ledger technology (DLT, typically a blockchain). While European financial markets regulation has recently been amended so as to include a pilot regime for DLT financial instruments, no such modernization has occurred in the field of harmonized VAT legislation. In particular, the rules on VAT exemptions for financial services have not yet been ‘tokenized’. As for the European Court of Justice, the only relevant case law concerning crypto-assets up to date is still the 2015 Hedqvist ruling on virtual currencies. But this case law cannot easily be applied to the sphere of tokens that have functionalities other than or beyond those of money. Against this background, the article seeks to demonstrate that the established case law and VAT rules regarding traditional categories of securities can nevertheless also be applied to security tokens so as to ensure technological neutrality of VAT. This implies that the issuance (STO), acquisition, holding and transfer of security tokens normally qualifies as either a non-taxable out-of-scope operation or as an exempt transaction. The exemptions also extend to some services in the broader token ecosystem, and notably those of exchanges. It will be up to national tax administrations and to courts to confirm these findings in the coming years and provide legal certainty to this promising segment of the crypto space.

Source SSRN

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