EU Advocate General Defines Bitcoin as VAT-Exempt Currency

Wire: Bloomberg BNA (BNA) Date: Jul 18 2015  3:03:02
EU Advocate General Defines Bitcoin as VAT-Exempt Currency


By Marcus Hoy
     Key Development: CJEU advocate general issues opinion saying
bitcoin should be treated as VAT-exempt currency.
     What's Next: CJEU to issue decision.
     July 17 (BNA) -- Bitcoin will be used more often for trade
and investment if the Court of Justice of the European Union
confirms an advocate general opinion categorizing bitcoin as a
currency because transactions will be exempt from value-added
tax, David Hedqvist, owner of the trading platform Bitcoin.se,
said.
     In a July 16 reasoned opinion, AG Juliane Kokott said
digital currencies, such as bitcoin, should be considered a
currency rather than property or other financial instruments, and
therefore shouldn't be subject to VAT in line with the exemption
provided for currency transactions under the EU's VAT Directive
(2006/112/EC).
     For VAT purposes, bitcoin is more akin to other recognized
currencies, Kokott said.
     Hedqvist welcomed the AG's opinion in a July 17 statement as
it lends support to the case he is currently arguing before the
Swedish Supreme Administrative Court.
     The case, Skatteverket v. David Hedqvist (C-264/14), was
brought by the Swedish tax authority to determine whether
Hedqvist should be charged VAT on transactions involving
bitcoins.
     The authority had appealed a lower court ruling to the
Swedish Supreme Administrative Court, which requested a
preliminary ruling from the CJEU.
     Presuming the CJEU takes the same position as the AG, the
ruling will only apply to bitcoin currency trades. Other forms of
taxation levied on virtual currencies, such as capital gains or
income tax on gains in the currency's value, won't be affected by
the ruling.

                      Categorizing Bitcoin

     Ahead of the CJEU's ruling on the case, Kokott examined
whether bitcoin could be deemed to be “securities” according to
the VAT directive. Article 135.1.f of the directive provides an
exemption on transactions in shares, debentures and similar
instruments. She found that bitcoin couldn't be categorized as
such.
     Kokott also examined whether bitcoin could be defined as
“negotiable instruments” according to article 135.1.d of the
directive, which refers to instruments deriving their value from
other currencies and not instruments with their own value. Kokott
found that the exemption under this provision shouldn't apply to
bitcoin either.
     In addition, she examined whether bitcoin could be
characterized as “currency” under article 135.1.e of the
directive, which refers to transactions concerning currency, bank
notes and coins used as legal tender. Gold, silver or other metal
coins aren't included in this definition.
     Kokott noted that the definition of legal tender appeared to
vary in different translations of the VAT Directive. While the
German version appeared to limit the definition to official
national currencies, other translations—such as the Finnish and
Italian versions—appeared to imply a broader scope.
     Using this broader definition, Kokott said that the purpose
of bitcoin appeared to be the same as that of a traditional
currency and the VAT exemption was applicable under this
provision.

                         EU-Wide Impact

     In a July 16 statement provided to Bloomberg BNA, Anders
Hultqvist, associate professor of law at Stockholm University,
said the AG's opinion and the CJEU's expected preliminary ruling
will have a significant impact across the EU.
     “The AG's conclusion is that the exchange of bitcoins to
Swedish kronor is a service within the scope of the VAT
Directive, but also that it is an exempt service according to
article 135.1.e,” he said.
     “This has been one of the hard questions, since there is no
national bank or other institution that issues this as legal
tender,” he noted.
     However, the AG found it to be unclear as to what can be
defined as legal tender. As such, she compared different language
versions of the VAT Directive and concluded from a more
purposeful view that bitcoin are used as tender and exchange, and
therefore should be considered to be exempt on these grounds,
Hultqvist said.
     “Some member states, with good reason, don't define legal
tender this way, but the AG has a good point,” Hultqvist said.
“Bitcoins are used and work mainly in the same manner,” he said.
     “The result is that the exchange service is exempt from
VAT,” he explained. No VAT needs to be charged for the exchange
of bitcoins to Swedish kronor, nor to any other currency when
performed within the EU. “Provided the EU court reaches the same
conclusion, those countries who have charged VAT on these
services must now change their practice,” Hultqvist said.
     “The judgment will of course have a great impact in all EU
countries, since all of them will have to follow the CJEU
judgment,” Hultqvist pointed out. “The Supreme Administrative
Court in Sweden will certainly deliver a judgment with reference
to the CJEU ruling,” he added.

                           General Use

     While the AG's opinion only refers to currency trades
involving bitcoin, David Hedqvist told Bloomberg BNA that it
would likely prove beneficial to the general use of bitcoin as an
investment and a means of payment. “This means that when it is
traded it will be treated much the same as any other currency,”
he said. “It will not be more expensive for consumers to exchange
between bitcoins and other currencies.”
     “If you look at how it is used as a payment in stores,
online and such, it has been gaining traction now over a number
of years, I don't think this [opinion] changes a lot there,” he
said. “But if you look at the bigger picture, now that the rules
are clearer, people will be less hesitant to get involved in
bitcoin.”
     The CJEU concurs with the AG's opinion in the vast majority
of cases.
     Hedqvist added that his legal team had also argued for a
VAT-exempt status to be granted on the grounds under article
135.1.d of the VAT Directive, which was rejected by the AG. “It
was interesting,” he said that the AG went with 135.1.e, which
“puts it together with other currencies.”
     The AG noted that 135.1.e is different in different
translations of the VAT Directive, Hedqvist said. “Because of
that it was important to look at the purpose of bitcoins,” he
added, welcoming the AG's decision to look at the purpose of the
exemptions as a whole.
     “To us at least, it was obvious that bitcoins should be
exempt because if you look at how bitcoin is used and what it is,
then it fits very well into that [135.1.e] category.”

                          Global Issues

     However, Hedqvist noted that differing tax treatment in
jurisdictions where bitcoin is used and traded could still cause
problems in the future because the CJEU's ruling would only
affect trading within the EU. “If you look at the global
situation, I think this is something that will be still being
discussed for many years,” he said. “But it's good that the
situation has become clearer here,” he added, referring to the
EU.
     Hedqvist said he now expects the Swedish tax authority to
“leave bitcoin alone” and accept the CJEU's decision. “A few
months ago, the tax authority published something about bitcoin
mining,” he noted.
     In that context, “they came to the conclusion that it was
exempt from VAT. The authority here seems pretty reasonable, so I
think that they will leave it alone now after this, but of course
there will be more discussion.”

                    Old Laws, New Technology

     “There are other laws, too, that need to be made clearer
with regards to where bitcoins fit in” Hedqvist said. “I guess
the problem is that when the laws were written there were no such
things as bitcoins. It's like a clash between old laws and new
technology.”
     Although he hasn't seen any figures for bitcoin use in the
EU, “if you look at the investments in bitcoin companies
internationally, it is steadily increasing,” Hedqvist said. “I
think that in 2015 the numbers will be higher than last year.”
     Many people “just look at the exchange rate and see that
bitcoins are booming one year and crashing the next year and so
on,” he said, “but if you look at the interest from investors,
there has been a steady increase. I haven't seen that so much in
Sweden, but internationally this is certainly the case.”
     Hedqvist agreed that other obstacles existed to the virtual
currency's acceptance, such as concerns about the potential
anonymity of transactions.
     “I think that some people will fight it,” he said. “To me,
it's kind of similar to when the Internet first came into
existence, and anyone could get online. People were pointing out
that there were all kinds of terrible stuff out there, kids could
find out how to build a bomb, that kind of thing.”
     As time went on, people realized that, on the whole, the
Internet was a positive thing, he said. “I think it's kind of the
same with bitcoins. There will be a lot of discussion about the
potential for criminality but I don't think that it will be
enough to stop it,” Hedqvist said.
     “I certainly don't think Sweden is the type of country that
would actually pass new laws prohibiting bitcoins,” Hedqvist
added.
     To contact the reporter on this story: Marcus Hoy in
Copenhagen at correspondents@bna.com
     To contact the editor responsible for this story: Anjana
Solanki at asolanki@bna.com

                      For More Information

     The EU VAT Directive is at
http://eur-lex.europa.eu/legal-content/EN/TXT/HTML/?uri=CELEX:32006L0112&from=fr.

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The above story appeared in:
Daily Report for Executives
Daily Tax Report


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