Taxation of Asset Tokens in Switzerland

The taxation of token in general

Cryptocurrencies or tokens are generated as units of value on a decentralized blockchain within a computer network. There are three main categories of such tokens for tax purposes which are also used by the Swiss Financial Market Supervisory Authority FINMA (guidelines for enquiries regarding the regulatory framework for initial coin offerings (ICOs) of 16 February 2018): payment token, utility token and asset token.

Payment tokens can be, depending on the specific distribution and infrastructure, used as a means of payment or shall (also) be used as means of payment according to the intention of the issuer. Utility tokens give the owner the right to use specified digital services or internet-platforms. Such services are provided by using a blockchain-infrastructure.

Asset tokens, on the other hand, represent an asset or monetary claims against the issuer. Asset tokens can be split into the following three sub-categories:

1. Debt token: The issuer of the tokens has the obligation to repay the investment and, possibly, to pay interest to the holder of the tokens.

2. Asset token with participations: The tokens represent a share in a company and in the profit of the company, as determined in the articles of association.

3. Asset token with a contractual basis: The holder of the tokens has the contractual right to payments determined in relation to specified factors (e.g. revenues or EBIT of a company). The below refers to asset tokens with a contractual basis.

Depending on the features of a token, there might also be a mix of the token-categories.

To determine how certain transactions relating to tokens are taxable, it is usually required to assess which main category is applicable to a token. There is a tax practice regarding the following taxes:

• Profit and capital taxes (for legal entities)
• Withholding taxes
• Income and wealth taxes (for natural persons)
• Stamp taxes
• Value added taxes

Taxation of asset tokens with a contractual basis with respect to profit and capital taxes

The revenues from the issuance of asset tokens with contractual basis are neither liabilities nor equity. These revenues are rather income for the issuer in Switzerland which is taxable as part of the annual profit. However, if the terms related to the tokens determine that revenues from the issuance of the tokens must be used for a specified project, the company can create a corresponding provision for business expenses in future years, in its balance sheet, which reduces the taxable profit.

Payments based on the terms of the asset tokens with a contractual basis to token-holders are principally tax-deductible expenses. However, this applies only if the company complies with certain threshold requirements regarding profit-participation and payments to shareholders (see below “Withholding taxes related to asset tokens with a contractual basis”). If the company does not comply, payments are treated as hidden profit distributions and are not tax-deductible. Depending on the specific project, such payments will be made irregularly or as a one-time payment, with the consequence that a threshold will be exceeded. In such cases, it is an advantage to discuss this with the cantonal tax authorities in advance.

Asset tokens with contractual basis are not equity and, therefore, are not subject to capital tax. If the company makes a profit from the issuance of the tokens, such profit is subject to capital tax as part of the equity.

Withholding taxes related to asset tokens with a contractual basis

With respect to withholding taxes, asset tokens with a contractual basis are qualified as specific kind of derivative financial instrument. Payments to holders of asset tokens with a contractual basis are therefore not qualified as income from participations. Hence, such payments are, in principle, not subject to withholding taxes (of 35%).

If the company does not comply with certain threshold requirements withholding tax can nonetheless be payable:

1. This is the case if shareholders of the issuer and associated persons hold more than 50% of the issued tokens. Therefore, the issuer must ensure, and document, that the majority of the token-holders are independent third parties.

2. Furthermore, the payments to token-holders must not exceed 50% of the EBIT of the company.

The implementation of these requirements is not that simple in practice. As a precautionary measure, the smart contract should provide a way to adjust the distribution mechanism or to suspend payments. Even if the thresholds will be exceeded this should not result in a re-qualification of the tokens; an asset token with a contractual basis, for instance, should not be re-qualified as an asset token with participations. Due to the complexity of these issues, it is recommended discussing this in advance with the tax authorities.

Taxation of asset tokens with a contractual basis with respect to income and wealth taxes

If natural persons hold tokens, the main question is whether they qualify as private assets or business assets. If tokens are used in connection with business or business-like activities, they are qualified as business assets. Payments related to asset tokens with a contractual basis are then subject to income tax and gains from the sale of such tokens as well. Furthermore, the holder of the tokens is required to pay social security contributions on the net income.

If tokens are part of the private assets, the gain from the sale of tokens is a tax-free capital gain. Payments related to asset tokens with a contractual basis, however, are subject to income tax. This also applies to repayments from the originally invested funds. All payments must be converted into Swiss Francs at the current exchange rate and declared in the tax return. Either the actual exchange rate can be used or the rate at one of the established online platforms such as coinmarketcap.com.

Tokens held by natural persons are subject to wealth tax. As other private assets, the taxable market value of the tokens is determined with a valuation per end of the year. If the SFTA published the tax value of tokens in their year-end list, such value is relevant. If not, the price listed at the trading platform used by the taxpayer is relevant.

Stamp taxes related to asset tokens with a contractual basis

The issuance of asset tokens with a contractual basis is not subject to issuance stamp taxes as they are not participations in a company. The transfer of asset tokens with a contractual basis is not subject to securities transfer taxes neither. Consequently, asset tokens with a contractual basis are not subject to any stamp taxes.

Value added taxes related to asset tokens with a contractual basis

The issuance of asset tokens is exempt from VAT and it cannot be opted to apply VAT voluntarily. The company is therefore not required to pay any VAT on the earnings from the issuance of the tokens. As the earnings are exempt from VAT, the company cannot claim back any input VAT in this regard. This also applies to VAT payable on the receipt of services from outside of Switzerland which are subject to Swiss VAT (reverse charge system).

Earnings of the issuer from the trade with asset tokens, with a contractual basis, are also exempt from VAT.

In the event that the issuer is entitled to transaction fees on the trade of the asset tokens in accordance with the smart contract, this qualifies as earnings from electronic services. The transaction fee is then subject to VAT insofar as the services are provided to Swiss domiciled (selling) token-holders; input VAT in connection with such services can be claimed back. If the domicile of the token-holders cannot be determined due to technical reasons, it is allowed to approximately determine the number of token-holders with domicile in Switzerland. The proceeding for this should be clarified in advance with the tax authorities.