A. INTRODUCTION
ICOs have recently exploded and become an increasingly popular method of fundraising for start - ups and other companies with the intention to fund innovative projects based on the Blockchain technology.
Our Firm being a business-oriented Firm has early identified the needs of the business world as to this innovative technology development based on Blockchain and in this respect has invested towards this direction with the establishment of an ICO team of professionals to cover all aspects of ICOs and assisting its international clients in this respect.
This is the second publication on the ICO subject. The first publication handling general issues of ICOs through Cyprus titled, “Initial Coin Offering (ICO) through Cyprus”, can be downloaded from here.
Summary of this publication
With this publication, we shall try to give clarity to the unclear and highly unstable issue of the TAX and VAT treatment of ICOs from the issuer company’s perspective. In particular, we shall deal with the issue of how the ICO proceeds received by a Cyprus issuing company may be treated, in terms of both direct taxation (Corporate Tax) and indirect taxation (VAT).
The review will be performed from the perspective of the Cyprus ICO issuing company. The tax treatment of the investors or token users would largely depend on the tax laws in their country of residence and it is outside the scope of this publication.
In the absence of specific guidelines by the Cyprus Tax Authorities on both TAX and VAT implications on ICOs, we will express our views based on the basic and fundamental provisions of the Cyprus Tax and VAT Legislations that are currently in force, while having in mind the general provisions of the International Financial Reporting Standards (IFRSs) that relate mainly to income recognition.
It must be stressed that the rights and powers represented by each token issue, are not uniform. As a result, there is no single answer as to how the issued tokens should be treated for tax purposes, hence, before concluding, careful consideration to the specific characteristics of each case is necessary.
VAT Rate
The currently applicable standard VAT rate for taxable supplies in Cyprus is 19%. As an ICO process involves a multinational approach with participants from all over the world, subject to the applicability of the offer, we shall mainly deal with the Vat aspect from Cyprus and in effect European Union (EU) perspective, where we consider the issued tokens will be mainly offered.
Income / Corporate Tax Rate
Cyprus can become one of the most beneficial EU jurisdictions for an ICO domiciliation due to its legal framework and flexible tax laws based on which business income of a Cyprus company is taxed at 12,5% on resulting net profits which tax rate may be further reduced subject to careful tax planning.
Intellectual Property (IP) Company
In addition, Cyprus has a very attractive IP Box Regime based on which 80% of Qualifying Profits generated from Qualifying IPs can be considered as deemed expenses and only 20% of the income is subject to 12,5% corporation tax, reducing thus the effective tax rate up to 2,5%.
As the most common result of an ICO is the development of intellectual property (IP), the benefits of the Cyprus IP Box Regime with the reduced taxation rate up to 2,5% might also be available to the ICO issuing companies making Cyprus one of the best destinations for an ICO having in mind also the rest of the surrounding circumstances.
For details of this Cyprus IP company treatment, you may refer to our Tax Update publication “The New Cyprus IP Box Regime” which can be downloaded from here.
The type of company to be used for the scope of our publication
The type of company for which we are considering the TAX and VAT treatment in an ICO prospect is the Cyprus Private Company Limited by Shares (LTD), being tax resident of Cyprus as we consider this type of company to be the most suitable vehicle for the intended operation of an ICO having a business nature and characteristics.
We have seen, mainly for tax reasons, foreign Foundations to be used as vehicles in ICO projects. Their charitable nature renders it questionable whether Foundations are indeed always a proper solution for all types of ICOs. It has also been suggested that Limited Liability Companies by Guarantee with or without share capital or even Purpose Trusts as another option.
For various reasons which are not the subject of discussion on this publication, we shall not examine those possibilities which might be the appropriate vehicles for particular type of ICOs having a philanthropic or charitable nature but not a business one.
On the contrary, a Cyprus non-tax resident Private Company Limited by Shares might be an option under the appropriate factual conditions but again we do not favor such approach, despite its tremendous Tax and VAT benefits from a Cyprus law perspective. The hidden risks involved in such approach makes us reluctant to suggest or consider such an approach.