Global Tax Update for September 2018
In the rapidly evolving digital landscape, the taxation of digital multinational enterprises (MNEs) and cryptocurrencies has become a hot topic of discussion. This article delves into the current status of taxation for these entities in Europe.
Recently, the Dutch firm name announced the hiring of tax specialist Job van der Pol to strengthen its international corporate tax team. Van der Pol, who joins as Partner and head of the Dutch tax team, has extensive experience in handling high-profile tax cases arising from the European Commission's state aid investigations into tax rulings issued to multi-national companies.
The taxation of digital MNEs is a complex issue, as many digital businesses can earn substantial revenues without creating a physical presence in a jurisdiction. The Organisation for Economic Co-operation and Development (OECD) is working on a long-term global solution for taxing digital businesses, with several jurisdictions examining the issue of taxing digital businesses without a physical presence.
The current rules were designed for non-resident companies with a physical presence in a jurisdiction, but the digital age has disrupted this traditional model. The debate about changing international tax rules for digital businesses is ongoing, with the OECD and European Union (EU) playing significant roles in shaping future regulations.
On the other hand, the taxation of cryptocurrencies is not governed by specific laws in most jurisdictions. The tax treatment of cryptocurrencies is based on general principles and guidance from Tax Authorities. The taxation status of cryptocurrencies in Europe varies by country, depending on the type of taxpayer (natural person, entrepreneur, or legal entity) and the nature of the crypto activity.
For natural persons, crypto income from sales is typically taxed as income (or capital gains) declared in personal tax returns, with progressive tax rates. Entrepreneurs or professional traders are taxed differently, often treated as business income with distinct accounting and deductibility rules. Legal entities face corporate income tax on crypto activities, with specific accounting requirements.
Notable examples include Portugal, which taxes short-term crypto capital gains at 28%, but gains from crypto held longer than a year are generally not taxed unless associated with professional activity or specific classifications. Germany exempts long-term crypto holdings (held over 12 months) from tax, making it somewhat unique within the EU. Other countries like Slovakia apply personal income tax rates with health insurance contributions on crypto income.
The EU does not have a unified crypto tax law but imposes frameworks like the Crypto-Asset Reporting Framework (CARF) that require crypto service providers (CASPs) to report users' crypto holdings and transactions to national tax authorities. CARF covers capital gains, staking rewards, lending income, and cross-border transfers, aiming to enhance tax compliance and prevent evasion.
Crypto transactions and income need to be reported similarly to other financial assets, with expenses like purchase costs and transaction fees often deductible up to the amount of income. However, losses may not always be deductible depending on the country. Health insurance contributions or social security may also apply on crypto income in some states.
Several countries remain crypto tax-friendly or tax-free on specific crypto gains, including Germany (long-term holding), Portugal (long-term capital gains), UAE, and certain offshore jurisdictions; however, these are exceptions rather than the norm in Europe.
In summary, Europe's cryptocurrency taxation is determined by national laws that categorize crypto income variably as capital gains, income, or business profits, with tax rates and deductibility rules accordingly. These national regimes are increasingly coordinated under EU frameworks focused on reporting and transparency like CARF, ensuring cross-border tax compliance but not creating a single, harmonized tax code for crypto at the EU level.
[1] EU Crypto-Asset Reporting Framework (CARF) - European Commission [2] Crypto-Asset Reporting Framework (CARF) - OECD [3] Cryptocurrency Taxation in Germany - KPMG [4] Cryptocurrency Taxation in Europe - PwC [5] Cryptocurrency Taxation in Portugal - Deloitte
- Given the extensive experience of Job van der Pol in handling high-profile tax cases related to the European Commission's state aid investigations into tax rulings for multinational companies, it's likely that he will contribute valuable insights to the Dutch firm's business in understanding and navigating complex finance issues in tax law, particularly within the digital landscapes of both digital multinational enterprises (MNEs) and cryptocurrencies.
- As the Organisation for Economic Co-operation and Development (OECD) and European Union (EU) are actively working on long-term solutions for taxing digital businesses, it's crucial for businesses to stay updated on the latest changes in finance and tax law, as evolving regulations could significantly impact the viability of their operations within Europe, especially when considering the current complexities surrounding taxation for digital MNEs and cryptocurrencies.
