Tax Efficiency in Web3

Transcript

All right. So, we discussed a little bit about global standards, uh, which are incredibly important to making the efficiency of our industry work. Uh, but one thing that is on the minds of a lot of entrepreneurs is, uh, when I make all of this money through my crypto gains, uh, how do I render that more efficient or at least be in the right place at the right time? So I think that's the topic of the conversation that Thomas is about uh to moderate here today around tax efficiency in web 3. So let's welcome Thomas and the rest of the panelists onto the stage uh and maybe we can give them a round of applause so that they can hurry up. Thank you.

Sit here. So I have the pleasure to see this. So thank you very much uh for this kind words. Uh welcome to today's panel on tax efficiency in web three. Let's look back maybe three to four years. We had always a tax panel here at the crypto valley conference. Um and uh we always discussed current tax issues always issues issues issues but now uh so that there was the treatment of ICOs, native tokens, staking, some banking regulations, VAT uh registration

uh and I can today happily announce we don't have any issues anymore. We don't have any issues anymore. um at least according to my honest opinion we have solved most of them during the last one to two years we have a lot of legal certainty uh in the tax uh environment here in Switzerland and that's why I uh told you that we have a good mood panel so that's a good mood panel now and I think it's the only the first time in history that a tax panel h is a good mood panel Um so we will discuss um the legal certainty we gained. We

will uh discuss the collaboration with the tax authorities as a strength of Switzerland. And certainly we need to highlight that tax efficiency is not meant tax avoidance but it's meant legal certainty, compliance and planning opportunities. So welcome to today's good mood panel on tax efficiency in web 3. Um Olga Gido and Alison maybe you introduce yourself very shortly about your person, your company and why is tax relevant for your role. Yeah sure. So good morning everyone. My name is Olga. and chair of

western chapter of crypto value association based in Lausan and um I'm also legal and tax uh advisor for many companies including blockchain related and digital assets related so thank you good morning everyone my name is kid hoopin I'm the CFO of signnum bank um there obviously tax is one of the key items on our side um in the accounting uh world especially for the legal plant the keyboard also for clients. So that's why it's always a hot topic when we have anything to discuss there. Good morning everyone. I am pleased to be part of the good mood panel. That's I like the way you phrase that. Uh my name is Allison

from I'm the CFO for a foundation, a Swiss foundation supporting Luxo, which is a layer 1 blockchain. In my previous life, I was a corporate banker um in the US and uh really pleased to talk about the fascinating topic of tax efficiency. Excellent. Maybe all can you provide us with a short kind of overview about the Swiss tax system, which taxes are relevant for web free projects and what topics um are are relevant for for these uh for these projects. Yeah, thank you.

I think to begin with what is important and as you mentioned as has been discussed many times here what is important that's uh t uh token classification and um basically being payment utility or asset tokens and the token classification shapes the whole uh the tax treatment furthermore and again depends on them on the setup it could be different outcomes uh of course The biggest effect of course is um corporate income tax as for any other business and for talking related for DT business basically net revenue means deducted

uh with um with taking into cons consideration deductible expenses. Net profit from uh token uh related revenue or services or rewards. um this net profit is taxable for corporate income tax perspective. Another um aspect to consider is VAT and um again this to large extent depends on the classification of the tokens and it's almost always the case of utility tokens.

But here what is what is interesting in particular in Switzerland that for example bitcoin mining activity is considered as vibleable in Switzerland which is not the case for other countries for example in Sweden it's strictly it it clearly says that um bitcoin mining activity is not vable and this is a huge advantage for um Swissbased companies because an opportunity to deduct vtm energy costs. Um, another tax is withholding tax and uh this tax can be relevant for uh income derived from investment tokens

with participation rights. this can be relevant. Um but in other type of income for example staking which is way more maybe common type of the income the staking rewards is not considered by from the Swiss perspective is not considered like as interest or yield. Therefore the staking rewards are not subject to tax which is also quite significant in Switzerland. it's 35%. And um this is quite clear that uh the staking rewards are not taxable for withholding tax which is again not the case for other specifically European

countries for example Italy. So for Italy they on the contrary they uh treat staking rewards as a taxable income for withholding tax and of course it can um affect significantly them the cash flow. um stem duties they have very limited uh application for this kind of sector but if we are dealing with uh depth tokens uh which basically represent a claim on secondary market this can be and should be uh paid and also considered. So because um debt tokens they treated for both financial law and from tax purposes

treated as securities. That's why all the transactions on the secondary market basically they are subject to um stem duty. But what I also wanted to mention for web three projects founders which is often overlooked is the way how tokens are distributed. And uh here for example dealing with airdrops um sometimes the founders they don't really consider that air drops is also taxable event at their uh at the level of the the tokens recipient and also tokens distribution to employees or key project contributors

also depending on the relationship u and the functions provided if it's employee an employee receiving tokens also these tokens should be um correctly booked and recorded in the salary certificate with potential security social security uh booking and payments and this also can what is the trick part on this uh thing it can be the situation that um the tokens there should be booked at the fair market value and This can result to the case then the tokens received by employee can be can be disproportionate to the salary uh receiving by this

employee. Um but again the beauty I think of Switzerland is the fact that um we can often ask for tax rulings and uh the some specific cases they can be explained and some clarity can be provided in advance uh with the with the tax authority. think this is a strong advantage of Switzerland definitely. So maybe for you um certainly to to uh remind is there are kind of two main categories of taxes. So income tax that's the the one that you all know where you own you you file your own tax return right so there the local tax authorities are responsible so in souk the sugities in Zurich the Turk

authorities so you have there different authorities in each canton for the transactional taxes like VAT with folding tax stamp duty these are federal taxes so there you always talk to federal tax authorities in burn so these are different um authorities And because these are transactional taxes, they're only due if you do specific transactions. Um, so now talking about authorities um and how um how you you you deal with them. Allison, uh you moved originally from the US to Switzerland. So what's your kind of personal experience here with uh with

with tax topics and and and and and dealing with authorities in the US and Switzerland? Yeah, absolutely. Thank you for the question and it's it's an important one and I didn't coin this phrase, but there's a definite cultural difference that I feel Switzerland and the US. Um, in Switzerland, especially in Zoo, both personally and professionally, acting in my capacity as the CFO of the foundation, when I talk with the tax authorities, they see me as a client. They're open. I pick up the phone, I call them. Um, and you you made a very good point. Nobody's looking for tax avoidance, but tax clarity is important. And when I need a clear answer, I um can talk directly to the

authorities and they treat me as a partner. Um, unfortunately in the US, and you know, I'm very happy to be American, but in the US, the tax authorities tend to view you as a criminal, um, even if you can get somebody on the phone to answer a question, which is incredibly difficult. And these things matter to to a a Swiss foundation. I mean, our foundation um had a choice of where to be located. And the the the culture of viewing foundations as partners from the authorities um is incredibly important. And I mean I should say too the other the other factor that's important when thinking about a location when it comes to Switzerland is the expertise that's available. So not only do the authorities um talk to you, they value

you, the authorities themselves understand blockchain to a far greater degree than in the US, but then look at the panel is a perfect um example here of what we have in Switzerland. MME I mean we're benefit from Thomas' experience no doubt but for those of you who may have forgotten or not known why was the Ethereum Foundation built in Zuk because of regulatory clarity and MME's support to navigate that landscape for a blockchain foundation crypto valley association um it's a fantastic uh member-based body that brings together all kinds of expertise to both lobby on our behalf and um help us to share expertise with each other and then signum bank um is a licensed by FINMA

regulated Swiss bank that deals with cryptocurrency assets and and I know you've been a big part of making that happen in the US um unfortunately the the issue has become so politicized that it's hard to get regul regulatory clarity and the the US bank regulator is still trying to clarify what the position is for banks in the US. So, I've I know I've gotten a little far a field from the topic of tax, but the point is um tax specifically, but even more broadly, when blockchain foundations have a choice of where to locate, there are so many advantages in Switzerland. And the work that's been done to clarify um what the VAT position is for Swiss foundations that deal with blockchain assets is a huge advantage.

And we're not seen as criminals. I mean, that's an advantage, too. Yeah, that's true. And as you said, I think it's very important that also in Switzerland, we have this competition between the different cantons. So there is kind of a certain pressure that they come to uh good conclusions. Um and especially here in Souk, the knowledge of the tax authorities is very high. So if you have a very specific question, most probably they have already seen it or already discussed it. Um and similarly on the federal tax authority side they do a very good job in educating themselves and trying to be up to up to date. Um yeah and there there there was kind of

an example now during the last year actually we started one year ago at the crypto valley uh conference kind of gathering an an industry group of of web three foundations especially because there have been some uncertainties about VAT treatment of the foundations and uh it was quite a quite a process to as uh uh discuss with the relevant uh people in the authority these topics. But uh today we can yeah we are we have a very good result and everyone can can live with with what what is now the the practice um and uh that that was a very

successful year. Maybe we jump to other topics if we stay with VIT. So you already mentioned kind of the token qualification. Um maybe you can just highlight the kind of the the basics of of what what the current practice actually is. Well, I think what is important also for talking about VT is again uh this case law that has happened in Switzerland in 2023 on staking uh which provided clarity on treatment of staking rewards and uh what what was confirmed uh by the by the court is that the only

transaction fee is um supposed to be taxable for VAT purposes and also we are talking about the the Swiss VAT And here as always VAT is a kind of clientbased approach. So where the client is located and here it's important to see if um the delegator is u based in Switzerland or abroad. Uh also if the delegator is based abroad then the VT in this country should be should be considered the juris in where the client is located where the juris the the law of this jurisdiction should be considered and another important thing is if um the company is acting as

a validator that means running its own node or acting as a delegator and basically provide staking as a service which is a little bit different and in this context text only the reward for delegation will be also taxable event and subject to VAT and here what can be what is interesting uh to to mention like the banks providing staking uh banks are as financial institutions they're exempt from they they provide they don't provide vatable activity they um they're exempt from VAT but for staking this is a different type of income And even though the staking would

be provided no matter if they wait acting as a validator or delegator uh this activity would should be bibleable and the the banks also or financial institutions should be registered for v and um yeah and pay v but maybe also maybe you can provide a little bit info from the practice. So what does this mean for you in setting up staking activities? Yeah, I I think that that's really a topic which goes into both directions as well where um what we have experienced now over the last couple of years by setting up staking as well because I think stat staking as such is a brand new business also for the banking environment as

such. So uh most of the time when you look at new products uh then you have something comparable in the traditional world already where you probably then can see how the tax will be uh applied for for such new products. that wasn't the case actually on the staking side and and what we have learned now um over the last two years where we had an intensive exchange with the tax authority as well that it makes most sense obviously that you look at each individual case because um as Olga has highlighted you can act as a validator directly you can be a delegator itself as well and the treatment is is every

time completely different so you can't just have one solution in the way and then that you know whatever you're going to do whether you apply a staking on ease whether you do staking on any other token the treatment will be exactly the same. So what we have done obviously to ensure that that we adhere to all the rules because we also experienced a first audit on VAT which was quite interesting as well because you have the uncertainty in the market. Um we we we have done somehow a green field approach uh for all the staking which we uh currently uh offering and that's uh around five to six tokens at the moment

and we categorize them into different pots uh in the way um do we talk about non-custodial uh staking that means where we act as a validator but uh the staker itself is not a direct client of us so uh we will provide write the note and and those non-custodial clients uh stake through us or is it actually a direct client of us? So where we talking about the custodial staking where it then comes obviously implications in a way the client doiciled in Switzerland.

Um where do we provide this note is that out of Switzerland which then has a VAT implication. Can we run the note out of somewhere else? And by running the note also means obviously uh is there any substance because most of the work is or if we look at first at the servers they are most of the time run somewhere in the world but who maintains the servers who does all the other activities behind that one is that done out of Switzerland or done um from abroad and um so we really have done that for each single token and we came up with I think five different pockets now which we have submitted to the tax authorities

itself to get that ruled so that we can say whatever we do in the future for each new single token we can put that either into one of these buckets in the way as I said are we obviously running our own our own note um do we obviously delegate that are we just a door opener for a client who runs then through a third party known uh node as well so into which bucket that really goes and what does that mean from a from a tax authority uh and a tax treatment uh perspective as well. Um even that we were not successful I think with the first submission how we fought the whole treatment and and and and and especially the treatment from a tax

authority uh looked like I think that goes really back that we are somehow seen as a client as well. So um we have been able to go back to tax authorities and and explain to them as well that we do not really agree to all their assessment and and what turned out as well that they were really open to discuss that one and and and and even agreed to say look I think we had a different understanding but now through all the workshops which we did did or further explanations they got a better insight and and have seen the cases is from a different side as well. Hence they were also willing to change their

opinion and then probably not like in the states once you have taken a statement and it's like this. So once the box is ticked uh I think that's slightly different uh in in in in Switzerland and that that's a I think a really good experience which we have seen uh because the whole VAT treatment doesn't obviously just impact us as a legal uh entity. It also impacts the client directly of us. So uh when we talk about clients of us now really the ones which are onboarded and um there you have to distinguish as well I mean are you going to apply something which is probably in the best interest of the company but has a disadvantage of the of

the client. So you can't just run a one-sided view uh of of all that tax questions. So um we had to look that from a far wider perspective and and even had to implement now uh solutions where you must say it's in clear favor of the client. It may be a bit a disadvantage for for for the bank itself. um because as being a bank as well it's not as easy as as for many other companies uh on the input tax where you can easily uh reclaim 100% of the income tax whatever you generate uh through staking as well. So we have to apply a banking uh key which obviously increases our tax burden

because uh as Ora said as well we have many nonvettable transactions so that reduces the the return on input tax and uh there yeah you you have to go I think most of the time as well in the best interest of the client but overall I think just from practice perspective, I really can say staking as a whole is from a VAT perspective rather difficult. I think it's important that you really start from scratch and not saying okay now we have one initiative let's run it like this because probably in six months or in 12 months you still have the same

project but view it slightly different and that the impact again is from a tax perspective different. So you would have to go back to tax authorities again and refile which makes it far more difficult even as I said uh tax authorities are really open as well to obviously change their opinion or or even listen to your arguments if if you have changed the setup or or any views on that one as well. So uh overall just to close on that note I think um VAT is a challenging uh item from a corporate perspective especially in the financial world. um not for the illegal entity as well but also for uh private individuals

but the tax authorities are really open uh yeah to serve that in the best interest of the country as well obviously to make Switzerland an interesting uh country for such business and uh to support that one as well. Yeah, I think that the the main issue of EAD is that you don't pay it on the net profit, you pay it on your turnover. So depending on the numbers uh that can be quite a substantial amount and if you have a wrong qualification uh and the tax authorities go back five years uh that can add up to very substantial amounts and I think the main

learning as well here was you need to understand your own business. You need to understand your technology and the implementation and then you can educate the authorities and come to certain conclusions how these transactions are um treated and again then maybe in addition you need to take into account the legal relationships who is acting in its own name or on behalf of customers. or you're acting in the client's name and on their account etc. So depending on the legal um relationship again the treatment can be completely different um

and uh that's why you really need to know the details uh before you do qualifications. Maybe the the last topic um was token qualification. I mean you know you know payment utility asset tokens to make it short utility tokens are subject to VAT again on the turnover 8.1% payment tokens are not subject to VAT so now there was a certain there was a certain advantage to qualify a token as a utility token because then foundations um selling such tokens have an taxable activity and are able to reclaim

um VAT. But then on secondary market where GTO the bank comes in what was the issue then on your side? I think the big challenge we had we had and we have there as well is that um obviously then you have to or the client gets penalized with the with the 8.1 uh% of VAT on the underlying transaction. So if you obviously trade a 1 million ETH transaction through us and this token would be treated as a proper utility token. So then such a transaction will cost you obviously a million 81,000 Franks. So if you buy and sell, so you already can see that's

160,000 Franks of of of VAT charge, which means just if you hold that one not because you believe into the utility or uh or or on the blockchain itself, but rather trade that one that such a token just have to increase by 16% just to get flat out even if you um uh ignore the fees itself. So uh that obviously created a lot of discussions on our side as well also in respect then of the tax authorities because it was key for us really to understand um how such tokens are are are treated. Not that we fall into this uh VAT item where the business would be clearly gone because if you if

a client based in Switzerland trades that abroad then of course he would not pay that 8.1% uh which would be a clear disadvantage for the financial market. So uh I think there as well um as I have outlined before there was an audit on our side as well. There's far more clarity out there and uh it's the tax authority understand I think much better as well the utilities behind that one what certain tokens obviously uh uh provide and what they do in the background. So um that you probably could say most of the the tokens out there which are currently traded uh bought and sold um from the

different banks are treated as payment tokens even that as such uh they are utility tokens from a from a tax perspective but with a non-defined utility itself. Yeah. Which clearly I think that's very important. So you have the Fenmore qualification that doesn't need to match with the tax qualification. Most probably this is for you the same. Exactly the point I was going to make. The sophistication of the regulatory environment here that you can have a different classification from FNMA from a securities perspective versus from the tax uh perspective is a huge advantage.

And I think the to make it again short most of the native tokens protocol tokens are not taxable VAT utilities. They are treated as payment token from a VAT perspective. So if you trade, you don't pay VAT on that. Um and that's it actually. So time is up. Uh thank you very much for this interesting um view