Taxation of Initial Coin Offerings (ICOs) in Germany
What to avoid
Frank Fast, a crypto enthusiast, organized an ICO for his company’s “DoItYourself Coin” himself. He diligently researched solutions to all apparent problems and successfully raised 5 million euros. Proud of his accomplishment, he thought he had saved money by not seeking advice.
Three years later, he received a letter from the German tax office demanding VAT and corporation tax totalling 2.5 million euros. Unfortunately, Frank no longer had this sum as he had already spent much of the capital he raised. Now, he is investing in insolvency advisors and defence lawyers due to allegations of tax evasion. BaFin, the German financial regulatory authority, has also initiated criminal investigations for non-compliance with prospectus obligations during the ICO.
A better approach
Peter Prudence, another entrepreneur, raised 5 million euros through his ICO for the “Strategic Plan Coin”. He wisely invested in consulting services beforehand, spending around 95,000 euros. Although the process of communicating with supervisory authorities was tedious and time-consuming, everything was finalized as planned and the concept was approved by all parties.
When the tax office contacted Uwe, they confirmed that no taxes were due on the ICO. His project continues to run smoothly. Despite the initial consultancy costs, his account remains healthy. BaFin was involved in the planning from the start, and no VAT was charged.
Tax consideration is essential for an ICO
Our hypothetical example illustrates that the success of an ICO hinges on proper preparation. ICO initiators should always take into account tax rules in addition to regulatory issues related to the initial coin offering. Ignoring this can lead to tax claims of up to 50 percent of the funds raised after a successful ICO.
In reality, it’s not always clear-cut how to structure ICOs optimally. There’s a spectrum between 0 and 50 percent taxation, and with active structuring advice, you can potentially reduce your tax burden. Our lawyers and tax advisors are available to provide a comprehensive assessment of your project.
Save on taxes by planning ahead
The only way to prevent half of the collected funds from going to the tax office is to optimize the structure beforehand:
- This starts with the correct design of the tokens to be issued and includes the appropriate choice of law for the issuing company.
- When structuring tokens, regulatory and tax advice should be coordinated. What may seem beneficial from a regulatory standpoint can often be detrimental from a tax perspective. It can often be more advantageous to accept regulation by the Federal Financial Supervisory Authority (BaFin), as the associated costs are often far outweighed by the tax savings.
- Involving a charitable foundation could be another viable option.
- The income tax burden in the initial period following the ICO can potentially be reduced by skillfully structuring the white paper and the token sale agreement, in accordance with accounting law provisions.
Our ICO specialists are ready to provide advice on the most suitable structure for your Initial Coin Offering.
ICA and VAT risk: avoid criminal proceedings
We frequently counsel ICO initiators who had previously overlooked the issue of VAT. The European Union Court of Justice has determined that Bitcoin sales are VAT exempt. This exemption extends to other cryptocurrencies only if they can be used exclusively as a payment method, like Bitcoin.
- Since the tokens issued in an ICO are typically tied to the company’s business model, it’s crucial to carefully assess whether VAT exemption is still possible. Our tax advisors and tax law specialists, who have experience in the cryptocurrency field, can discuss various structuring options with you and implement them if necessary to ensure the token sale is VAT-exempt.
- If the token sale is subject to VAT due to inadequate preparation, the impact on the issuing company is significant. Since the sale of tokens is often classified as a miscellaneous electronic service, VAT is payable at the consumer’s place of residence according to the relevant local rules.
- The issuer must therefore familiarize themselves with the relevant foreign VAT regulations and register for VAT if required. This process is generally simplified in Europe by the Mini-One-Stop-Shop (MOSS). However, the issuer may struggle to identify the origin of its buyers if they can invest anonymously using cryptocurrency. This could lead to a realistic risk of failing to meet their VAT obligations. Double VAT claims or suspicion of tax evasion could ensue.
Simple ICO abroad?
We strongly caution against enticing offers and model solutions that suggest it is easy to save taxes by moving abroad.
International solutions can often be beneficial. However, these organizational models require meticulous planning. To implement such a concept with sustainability and legal certainty, the actual living conditions must be scrutinised. It would be frustrating to invest in foreign structures only to be required to pay the full amount later due to regulations in the German Foreign Tax Act. If you are genuinely flexible about the centre of your life and are willing to live with such arrangements, you might be able to benefit from a company structure in a low-taxed foreign country.
Moving abroad does not necessarily mean that BaFin will no longer supervise you. If your company’s tokens are offered in Germany, German supervisory law will still apply. As some elements of the German Banking Act (KWG) specifically require a presence in Germany, this move may not be beneficial in certain cases.
Your attorneys for Initial Coin Offering taxation in Germany
Are you considering raising capital for your company, research, or idea through an ICO and offering a coin yourself? You can easily reach your ICO contact person via e-mail at (info@winheller.com), by phone at +49 69 76 75 77 85 28, or through our contact form on the taxation of cryptocurrencies.
