Qualification of the cryptocurrencies
The Circular first specifies that, since cryptocurrencies have no legal tender and do not represent means of exchange whose value is supported by a central bank, they should not be considered as currencies, but rather as intangible assets for Luxembourg income tax, business tax and net wealth tax purposes.
As a result of the above, Luxembourg tax authorities will not allow that a company provides a balance sheet and/or a profit and loss account established in cryptocurrencies for the needs of taxation.
The Circular also specifies that, for Luxembourg tax purposes, any profit or expense denominated in a cryptocurrency should be converted in Euro (or any other currency whose tender against Euro is covered by the European Central Bank). Such conversion should take place against the daily exchange rate published by one of the crypto exchange platforms accredited by the Luxembourg Commission for Surveillance of Financial Services (CSSF). For now, two exchange platforms fulfill this condition (i.e. BitStamp and BitFlyer, whose exchange platform is respectively based in UK and Japan).
Qualification of income derived from transactions involving cryptocurrencies
Income derived from transactions involving cryptocurrencies qualifying as business income
Provided that the conditions provided for in article 14 of the Luxembourg Income Tax Law (“LITL”) are cumulatively met (i.e. an independent activity carried out with lucrative intent, in a permanent manner and representing an involvement in the general economic life), income derived from cryptocurrencies (e.g. from the disposal of or from crypto mining) is deemed to be part of a business activity and should therefore qualify as business income.
The Circular states that these conditions are deemed to be met in certain cases e.g. in case of crypto mining, in case of running a crypto exchange platform or a cryptocurrencies dispenser (e.g. Bitcoin ATM).
Although the distinction between a business activity and passive (private) asset management is to be assessed on a case-by-case basis, the following criteria may point towards the existence of a business activity:
- Premises or organization dedicated to operations related to cryptocurrencies;
- Use of borrowed funds;
- Important turnover in the inventory of cryptocurrencies;
- Trade on behalf of third parties.
The Circular also reiterates that, when the activity is carried out by a commercial company (e.g. S.A., S.à r.l. etc.), the income derived from such activity qualifies in any case as business income.
Income derived from transactions involving cryptocurrencies qualifying as other income
When the income does not qualify as business income, it should qualify as other income under article 99 LITL.
Consequently, any trade of a cryptocurrency against another cryptocurrency or against a traditional currency, or any payment for goods or services made with cryptocurrencies, should be seen for tax purposes as an operation of exchange of the relevant cryptocurrency against the asset/service received in return. In other words, any of these operations would trigger the recognition of a speculative gain or loss (subject to income tax - at the marginal rate of around 42%) if the cryptocurrency has been disposed of within six months following its acquisition. In case of disposal after a longer period, or when the yearly total speculation gain does not exceed EUR 500, it should not be subject to tax.
The Circular also obliges the taxpayer to keep a coherent and continuous record, notably in respect of the acquisition date of cryptocurrencies (or creation date for crypto mining) since he bears the burden of such proof. Finally, the weighted average price method should be used for the determination of the acquisition price when the circumstances make this price difficult or impossible to assess.
Net wealth tax treatment of cryptocurrencies
For Luxembourg net wealth tax purposes, applicable to Luxembourg resident fully taxable companies only, and levied at a rate of 0.5% per annum, the cryptocurrencies should be valued in accordance with the provisions of the Bewertungsgesetz (Luxembourg evaluation law), i.e. at their fair market value.
One of the questions arising from this Circular is whether the classification of a cryptocurrency as an intangible asset should also be extended to e.g. the Luxembourg law of May 11, 2007 which deals with the Luxembourg Société de gestion de Patrimoine Familial (“SPF”). Under this law, a SPF can only own financial instruments (meant in its broadest sense) whilst it is at the same time not allowed to carry out a business activity.
Being characterized as an intangible asset, would a SPF be allowed to own cryptocurrencies within the framework of private wealth management? The answer remains unclear.
Since the SPF is supervised by the Luxembourg indirect tax authorities (Administration de l’Enregistrement et des Domaines), the present Circular (having been issued by the direct tax authorities) should not necessarily prevent the SPF to be allowed to hold cryptocurrencies in compliance with the law of May 11, 2007.
Nevertheless, whether cryptocurrencies are to be considered as financial instruments or not is currently being reviewed by most financial regulators worldwide and the answer is still unclear in most cases.
Certain foreign financial authorities have issued guidelines or tests to determine on a case-by-case basis if a cryptocurrency shall or not be treated as a financial instrument and we also believe that cryptocurrencies may develop over time further attributes (e.g. stability, government backed) and fit more in the definition of financial instrument.
This situation is expected to evolve in the next coming months as cryptocurrencies and blockchain are gaining legitimacy and start shifting toward the traditional financial system (e.g. first exchange-traded funds for cryptocurrencies currently waiting for US Securities and Exchange Commission’s approval).
Finally, it is worth noting that the Luxembourg indirect tax authorities have issued the circular n°787 on June 11, 2018, based on a recent ECJ case law, which confirms that cryptocurrencies, like traditional currencies, should benefit from the exemption provided for by the VAT Directive n°2006/112/CE, as long as these cryptocurrencies are a direct means of payment and accepted as such by certain operators. Although not all cryptocurrencies are designed as a means of payment, it seems clear that some meet this condition (Bitcoin, Litecoin, Nano…) and may therefore constitute an eligible asset for a Luxembourg SPF.
Tiberghien Luxembourg remains committed to monitoring the recent developments regarding cryptocurrencies within Luxembourg. If you would like more information, then please contact Michiel Boeren, Maxime Grosjean or Marie Fraycinet, or your trusted adviser at Tiberghien Luxembourg.