10 January 2024

Guidance From The European Commission's VAT Committee - VAT Treatment Of NFTs

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The European Commission's Working Paper No. 1060 (hereinafter the 'WP') of the EU Value Added Tax (VAT) Committee is a significant policy attempt in relation to the VAT treatment of transactions...
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The European Commission's Working Paper No. 1060 (hereinafter the 'WP') of the EU Value Added Tax (VAT) Committee is a significant policy attempt in relation to the VAT treatment of transactions involving non-fungible tokens (NFTs) and as a proposal for establishing a common approach and harmonization of the VAT treatment on NFTs in the EU single market.

What are NFTs?

NFTs are based on blockchain technology in the form of a unique digital token that can be used as a digital asset that represents Internet collectibles such as music, art, GIFs etc. NFTs cannot be replaced nor interchanged with one another in comparison with physical money and cryptocurrency. The fact that they are unique and can prove one's authority over a purchased asset has generated massive sales in the digital and crypto savvy audience. Generally, when it comes to VAT on NFTs the usual practice is to apply the general tax rules (subject to local or EU legislation). Yet, this sometimes appears to be challenging, as NFTs do not perfectly fit into any current definitions or pre-existing VAT treatments.

Can NFTs be subject to VAT?

The main challenge around NFTs is the question of what is being supplied when the NFT is created or sold. This raises the question as to whether they can be treated as a service (electronically supplied services) or goods.

The EU VAT laws categorise supplies into two main categories: goods and services. NFTs cannot constitute (or it may be challenging to be identified) as tangible assets. The remaining option is therefore to be treated as services for VAT purposes. As provided under the WP, NFTs are to be treated as digital services with the appropriate rules regarding VAT on digital services to be applied.

The EU VAT Committee, with its working paper, aims to address the aforementioned challenge by highlighting that NFTs are predominantly employed for items that can be distributed digitally (either solely or not). However, NFT applications are expanding beyond these scenarios to encompass real-world applications. For instance, NFTs are being utilized to represent ownership of tangible assets like real estate or fashion items via blockchain technology.

The determination of VAT rules or VAT treatment for each transaction involving NFTs will depend upon the categorisation of the supply with which the NFT aligns. The WP outlines the following qualifications:

  • Property Title - The working paper suggests that an NFT, functioning as a digital proof of ownership similar to a property title, could be likened to property titles. Consequently, this comparison may influence the VAT treatment of NFTs based on the nature of the goods or services involved.
  • Voucher – Where purchasing the NFT is involved, the holder can redeem it for a specific good or service (i.e., when the NFT is permanently removed from circulation), the so-called "burning", in such cases, the VAT treatment of NFTs should be the same as for vouchers.
  • Composite Supply - The working paper notes that its comparison of NFTs with composite supplies is based on case law of the Court of Justice of the European Union (CJEU) since the EU VAT Directive does not address any specific rules for composite supplies. Also, according to the WP, the supply of an NFT and the underlying asset could be an indivisible economic supply, which would be artificial to split. In that case, the composite supply would have its own, distinct VAT treatment.
  • Electronically Supplied Service (ESS) - The working paper notes that it is often unclear what constitutes an ESS. If an NFT's asset is digital in nature, its supply provides the recipient with access to, and rights over, that digital asset. The WP suggests that in this case the NFT would fall within the definition of an electronic service.

Another area that the WP explores is the taxable status of the parties involved in transactions relating to NFTs:

An individual is deemed to be a taxable person for VAT considerations, if they can be seen as operating independently as a service provider and engaging in an economic activity, regardless of the intent or outcomes of that activity. However, the WP indicates that a network validator performing "minting" services should not automatically be assumed to be a taxable person for VAT purposes.

Minting refers to the act of uploading an NFT onto the digital ledger, commonly known as the blockchain, which involves taking a specific amount of tokens as collateral, which achievable with any standard computer. Nonetheless, as per the WP, minters might qualify as taxable persons, falling under the VAT Directive, potentially impacting marketplaces where these individuals sell their NFTs, as minting can qualify as an electronic service.

The WP proposes an alternative scenario in the event that NFT minting is delayed until the actual sale of the NFT (referred as "lazy minting"). In many cases of lazy minting where no payment or consideration is involved, this particular activity might not fall within the scope of VAT.

In summary, the key takeaways from the WP in relation to the VAT treatment of the creation and supply of NFTs are:

  • NFTs are generally considered to be services (and not goods).
  • The WP offers an overview of the NFTs' nature and the mechanisms for their creation, trading, and sale, by drawing comparisons to property titles, vouchers, composite supplies and electronically supplied services.
  • The WP provides a number of initial considerations regarding the VAT treatment of NFT related transactions, however a definite approach has not yet been adopted.

NFTs VAT rules in Other EU Countries:

Some EU countries, including Belgium and Spain, have already examined these issues around VAT liabilities on NFTs having established their approach on the matter already. For both Belgium and Spain NFTs are considered as digital services.

Belgian authorities have determined that NFTs are distinct from other forms of digital currencies and that they do not qualify as a form of interchangeable payment. Instead, they are recognised as digital certificates of authenticity. This classification differentiates them from both digital currencies and physical goods. However, in contrast to Bitcoin, Belgian authorities have decided that NFTs will not be considered VAT-exempt payments. Instead, they will be subjected to the standard Belgian VAT rate. Furthermore, the sales of NFTs will also be subject to Capital Gains Tax, similar to the treatment of cryptocurrencies.

In a similar approach the Spanish authorities perceive NFTs to be a form of an electronic service provision that should be subject to the standard VAT rate as well. Under the Spanish approach, NFTs are digital assets that lack interchangeability, setting them apart from cryptocurrencies.

The current WP is a first attempt to generate further discussion around this area as VAT liability and tax authority guidance on NFTs amongst the EU members states is limited. With a number of questions that need to be answered and a common approach to be established to achieve the harmonisation objectives, it is expected that this topic will be on the top of the regulatory agendas of the relevant authorities both within the EU institutions and at national legislative level for each member state.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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