Crypto income taxation & Foreign structuring
Crypto income taxation & Foreign structuring
Crypto income taxation is one of the most popular regulatory topics in the crypto sector. The most FAQ include: (i) what are the tax optimization options, (ii) why health insurance contributions must be paid, or (iii) what are the chances that this will be examined by the tax authorities?
Our role here is to advise clients to help them make informed decisions. We also advise the state in the legislative development in this area, and we endeavor to improve the overall Slovak legislative environment.
One of our most significant and relevant legislative initiatives has been a proposal for tax staking, or an effort to address the issue of double taxation of goods or service payments received in crypto. The rate of taxation (and health insurance contributions) is not the sole major problem of inefficient Slovak tax legislation. There is also the threat of double taxation of goods or service payments received in crypto. The Income Tax Act seems unambiguous in a mechanical interpretation, and other than a mechanical interpretation is difficult to apply.
We advise clients on the crypto income taxation and possible foreign structuring in the following areas:
AML, Reporting & Crypto assets
We set up the essential administration for our clients in AML and expected reporting. We aim to act as a business advisor, so we don´t complicate these compliance elements. As we also provide a range of other consulting services in the crypto sector, it is in our interest to make each project functional and efficient too.
The AML area has defined the lives of compliance departments for several years. The crypto phenomenon keeps revealing new regulatory challenges in this field. In addition to purely executive and interpretative challenges, there are also legislative ones with spillover into the other areas of law and tax. We have spoken on these problematic points on several occasions in our lectures at the Ministry of Finance and the Slovak Chamber of Tax Advisors. We often lecture on these topics, and we devoted them a significant space at our legal and tax conference for tech companies. We comment on the topic in the media, publish articles, give lectures, and organize training sessions and webinars.
The dominant topic in the reporting sphere is tax reporting, initiated by the DAC8 Directive. In 2020, the European Commission adopted a new tax package: the “Action Plan for fair and simple taxation supporting the recovery” (the Action Plan), which ramps up the fight against tax abuse. It updates the DAC Directive (a directive which aims to combat tax fraud and illegitimate tax optimization more effectively) to broaden its scope and strengthen the administrative cooperation framework. As a result, the DAC8 initiative and the associated public consultation launched by the European Commission seek to ensure adequate tax transparency and proper taxation of income from crypto and e-money investments and payments. This initiative seeks to ensure consistency with other ongoing work at the EU level, such as the forthcoming anti-money laundering and countering the financing of terrorism legislative package. You can read more on these topics at our page dedicated to crypto legal and tax topics.
Crypto & VAT
A popular opinion in society (including some advisors) is that VAT does not apply to crypto assets at all. This is not true. Granted, the European Court of Justice´s 2015 ruling held that a company that purchases virtual currency units from third parties and resells them through its exchange carries out activities exempt from VAT. However, the decision only addresses BTC as payment tokens (virtual currency). It therefore applies to the crypto-asset types that seek to act as a legal tender. It thus follows that crypto assets of different characteristics (NFTs, security tokens, or utility tokens), or ancillary services (even if labelled as financial services), can be by themselves considered exempt from VAT.
We are intensely focused on this issue. We gave a lecture on this subject matter at the methodological days of the Slovak Chamber of Tax Advisors, and we helped the state comprehend this topic for the purposes of issuing methodological instructions. The subject is very complex and, as we said in an interview with TA3, it is still not comprehensively understood. This results in several practical problems which are, naturally, being ignored in practice.
If you are interested in crypto & VAT, read more on the subject on our platform dedicated to crypto legal and tax topics. We further comment on this subject in the media, publish articles, give lectures, and organize training sessions and webinars.
Crypto & Financial regulation
Most crypto legal advice revolves around financial regulation. As we are heavily invested in fund regulation, securities, and payment services even outside of crypto, it is only natural that we deal with financial regulation (including MiCA) too when setting up crypto projects,. This is in addition to the tax and accounting elements. We also actively advise the state in this area.
The crypto assets regulation is more complicated than it may seem. Although the NBS has indicated in several statements the lack of substantive scope of existing financial regulation for crypto transactions and projects, the reality may be different. Take, for example, various intermediary business models involving the management and administration of crypto assets, which may interfere with existing payment services regulation. (i.e., the issuance of certain types of “asset referenced tokens” or “security tokens” may also appear problematic from the point of view of collective investment or securities regulation, despite crypto assets generally being considered neither securities, nor financial instruments.)
The regulation of investment services provision is also problematic where Slovak crypto asset service providers meet the characteristics of the regulated investment service provision. This exposes them to the risk of criminal prosecution for the offences of unauthorized business activities and legalization of the proceeds of crime (legalization of income generated as a result of criminal activities). In addition to these areas, AML, e-money, or banking regulations (especially for DeFi) should not be forgotten in crypto projects. Without a more in-depth analysis of a specific crypto project, it is not currently possible to assess its compliance with financial regulation and the associated practical risks (asset freezing or criminal prosecution). The supervisory involvement of NBS is also questionable.
You can read more on this topic on our platform dedicated to crypto legal and tax issues: www.cryptotaxlaw.sk.
Although the Ministry of Finance of the Slovak Republic has issued methodological guidelines on the basic cryptocurrency accounting regimes, the economic and functional diversity of crypto assets is moving in leaps and bounds. In practice. we regularly encounter inconsistencies and questions posed by clients, accountants, and tax advisors alike.
Our office pays the topic of crypto accounting significant attention. In April 2022, we published the first (and so far, the only) Slovak e-book on accounting for crypto assets. We lecture on crypto accounting in a range of fora and publish articles. We strive to understand our clients’ businesses and in so doing, we have come across many interesting accounting situations (such as):
As the Slovak accounting regulations do not offer answers to a number of topics, we rely on the IFRS standards and foreign inspiration in accounting.