French VAT treatment of the issue of the tokens during an ICO

The question of the VAT liabilities of an ICO has been explored in France through the “rescrit” of 7 August 2019.
VAT is the most efficient tax system. It is defined as “a tax applied on the value added to goods and services at each stage in the production and distribution chain”. It applies to all goods and services that are bought and sold for use or consumption.

So, in an ICO or any sale of digital assets, would VAT normal rules apply?
There are basic conditions used in defining the scope of VAT that may be used to answer the question. It will be applied on any transaction if the main following conditions are satisfied:
  • The  taxable transaction should be profitable;
  • The delivery of goods or provision of services must carry a financial compensation from the beneficiary;
  • A supply of goods or services has to be made;
  • The cost of goods or services on which VAT is incurred must have a direct and immediate link to a taxable transaction.

With this respect, would the sale of cryptocurrencies or tokens be subject to VAT?
In its answer the rescript of 7 August 2019, the French Tax Administration stated:
  • For crypto currency
There are some ways of obtaining coins like accepting them in exchange for goods and services or buying them on an exchange platform. They are often exchanged for legal tender currencies, such as euros or dollars. But, it is hard to categorize Bitcoin because it is new and different from other assets available to market participants.

So, what is the classification of Bitcoin? Is it a currency or a commodity?
A commodity is defined as “a basic good used in commerce that is interchangeable with other commodities of the same type1”. In 2015, the CFTC (Commodity Futures Trading Commission) considered that Bitcoin and other virtual currencies fit the definition of a commodity because they can be exchanged in a market for a uniform quality and value2. However, currently, Bitcoin’s role is equated to the traditional currency, although it is not a physical currency. So today, Bitcoin is an accepted form of digital currency.

For that reason, the Tax Administration specified that exchanging Bitcoin for traditional currency is exempt from VAT because of its qualification as an exchange operation which is not subject to VAT. Besides, for the same reason, article 261 C of the General Tax Code and the decision of the Court of Justice of the European Union (CJEU) dated 22 October 2015 mentioned that the exchange of traditional currency against the virtual currency is exempt from VAT.

However, the administration added that supplies of any goods and services subject to VAT, remunerated by way of Bitcoin, should be treated in the same way as any other supplies for VAT purposes and may be subject to VAT.

  • For tokens 
ICO start-ups develop a cryptographic token which is then offered to its supporters in exchange for a virtual cryptocurrency.

According to the “rescrit” of the Tax Administration, the ICO itself may not be regarded as a taxable event for VAT purposes. If there is no direct link between tokens issued and the service provided at the moment of the ICO, then VAT will not be applied.

Besides, the Tax Administration mentioned that the tax treatment must be defined according to the category of tokens. They are divided into two broad categories:  security tokens and utility tokens.
Firstly, a security token is a digital asset which gives to its holders ownership rights in the company. It is usually not allowed to be resold freely3. If the token gives its beneficiary only the right to receive dividends and to take decisions, it will not be subject to VAT. 

Secondly, a utility token is not created to be an investment and does not represent company shares. It enables future access to the products or services offered by the company4.

The Administration specified that utility tokens will be subject to VAT only if a direct link exists between the services supplied and the consideration received by the taxable person. It mentioned that during the issue of tokens through an ICO, the service and the corresponding price cannot be clearly identified, because at this stage, issued tokens serve the sole function of funding a start-up company, and not as a payment for any kind of service. It means that there is no direct link because the issued tokens are used for the development of future products and services by the issuing company.

In the words of the Tax Administration, utility tokens will only be subject to VAT once they are traded for identifiable services of this company that has previously issued such tokens. That means that any future use of such tokens as a means of payment and access to products and services offered by the start-up company once developed may be subject to VAT.


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