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Bitcoin Wins VAT Exemption Before Europe's Top Court

by Ulrika Lomas, Tax-News.com, Brussels

23 October 2015


The European Court of Justice has ruled that taxpayers that exchange traditional currencies for units of the "bitcoin" virtual currency should be exempt from value-added tax, in a long-awaited ruling that will create greater certainty regarding the tax treatment of using and trading in virtual currencies in the European Union.

In its ruling on October 22 in Skatteverket v. David Hedqvist (Case C-264/14), the ECJ said that "purchases" of bitcoin should fall under provisions in the EU VAT Directive that provide that member states must exempt, among other things, transactions relating to "currency, bank notes, and coins used as legal tender."

David Hedqvist, a Swedish taxpayer, had earlier received a favorable ruling from the Revenue Law Commission, but its decision that bitcoin transactions should be exempt was challenged by the Skatteverket before the Supreme Administrative Court, Sweden.

The Swedish Government had argued that the transactions that Hedqvist intended to effect were not covered by the exemptions provided for in the VAT Directive. The Swedish court then referred the matter to the ECJ.

In its October 22 judgment, the ECJ agreed that transactions to exchange traditional currencies for units of the 'bitcoin' virtual currency (and vice versa) constitute a supply of services for consideration within the meaning of the directive, since they consist of the exchange of different means of payment and there is a direct link between the service to be provided by Hedqvist and the consideration received by him, namely the margin created by the difference between, on the one hand, the price at which he purchases currencies, and, on the other hand, the price at which he sells them to his clients.

The Court also held that those transactions are exempt from VAT under the provision concerning transactions relating to 'currency, bank notes and coins used as legal tender'. To exclude transactions such as those envisaged by Hedqvist from the scope of that provision would deprive it of part of its effects having regard to the aim of the exemption, which is to alleviate the difficulties connected with determining the taxable amount and the amount of VAT deductible which arise in the context of the taxation of financial transactions, the ECJ said.

Commenting on the significance of the ruling, Richard Asquith, VP of Global Tax at tax automation providers Avalara, said: "Today's ruling will help boost the UK's prospects of securing its position as the European and global hub for the bitcoin sector. As long as the VAT treatment of bitcoin remained uncertain, intense competition from global exchanges such as Switzerland, Singaporem, and Hong Kong, threatened to take market share.

"This is also the first step in securing bitcoin's future as a genuine alternative to national currencies. The next stage will be receiving regulatory compliance approval from national banks. Today's ECJ ruling will help lay the path to this. It will also give the wider general public the confidence to adopt digital currencies for their day-to-day use. Retailers and payment platforms will now likely step-up their investment in bitcoin management in anticipation of this."

TAGS: court | tax | value added tax (VAT) | mining | law | tax authority | Sweden | currency | European Union (EU) | services | VAT case law | Europe

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