INITIAL COIN AND TOKEN OFFERINGS IN SWISS TAXATION: LATEST DEVELOPMENTS

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1 May 2018 Number 05 INITIAL COIN AND TOKEN OFFERINGS IN SWISS TAXATION: LATEST DEVELOPMENTS Dr. Marcel R. Jung, LL.M., Attorney at law, Swiss certified tax expert, Partner, FRORIEP Legal AG, Zurich 2. Tokens: token money in the form 1. Introduction of coins General Meeting 2 Since 2014, Switzerland has become a preferred jurisdiction for initial coin (ICOs) and token offerings (ITOs). There is a tax reason for this development: payments by a Swiss issuer to token holders are only subject to Swiss federal withholding tax if a payment of the IFA Swiss qualifies as interest on bonds (collective financing schemes), dividend on shares, income Branch on February from units in collective investment schemes or interest on bank deposits. Other 8, payments are not subject to Swiss federal withholding tax. In practice, payments by a 4. Three levels: issuer, investors and employees... 3 Swiss issuer to Swiss and foreign token holders often qualify as other payments. The Swiss taxation framework and, in particular, its withholding tax provisions are of significance in the international context in order to attract international investors. On February 8, 2018, representatives of Swiss tax administrations presented for the first time considerations on the Swiss taxation of ITOs and tokens. 1 In practice, tokens are generated in many different forms. Each issuer can generate its own token. Due to the large number of different forms of ITOs and tokens, the representatives had to limit themselves to some examples. The purpose of this paper is to discuss and analyse the Swiss taxation of ITOs and tokens and the examples used in a broader context, and to 5. Legal analysis of the legal relationship as starting point... 4 show in particular the Swiss tax risks of the issuer. Enterprises, in particular start-ups, finance development projects more and more 6. Analysis of the frequently by means of ITOs in Switzerland. The projects often involve the development tax risks of the of digital platforms, goods and/or services. In the context of the financing transaction, issuer... 5 investors transfer funds to the enterprise (usually in the form of cryptocurrencies such as bitcoin and ether) and receive in return blockchain-based tokens. The issuer can generate 7. Tax treatment of tokens either on a newly created blockchain or through a smart contract on an existing ITOs and tokens... 7 blockchain. Tokens can be put into circulation at the time of fundraising or at a later time and can 8. Tax rulings have different economic functions: 2 9. Conclusions Gennari/Jud/Oesterhelt/Winzap, Initial Coin Offerings (ICOs), Handout, International Fiscal Association, Swiss Branch, Extraordinary General Meeting, 8 February 2018, Basel; Schmid/Gammeter, Steuerfolgen Ebene Mitarbeiter, Handout, International Fiscal Association, Swiss Branch, Extraordinary General Meeting, February 8, 2018, Basel; Ralf Imstepf, Aspekte der mehrwertsteuerlichen Behandlung von Kryptowährungen, Handout, International Fiscal Association, Swiss Branch, Extraordinary General Meeting, February 8, 2018, Basel. 2 Swiss Financial Market Supervisory Authority (FINMA), Guidelines for enquiries regarding the regulatory framework for initial coin offerings (ICOs), February 16,

2 TAX PROFILE 2 Tokens can be a means of payment (digital and crypto currencies) that are used for the purchase of goods and/or services (payment tokens). Tokens can provide access to a digital platform or a digital service (utility tokens). Tokens can embody a debt or equity relationship to the issuer (asset token). It should be noted at this point that the term token is a misnomer. A token embodies in most cases not a means of payment and is, therefore, neither a physical nor a digital coin, but a digital bundle of contractual rights and liabilities. ITOs highlight the tax challenges of the digital economy for both the administration and the legislator. 3 No case law, no administrative practice and no common doctrine with regard to the Swiss taxation of ITOs and tokens have been established so far. 2. Tokens: token money in the form of coins The English word token means in German marker or coin and is often used together with the word money in the composite term Token money. Token money is money whose face value exceeds, and the trade value is independent from, its intrinsic value. In order to better understand ITOs and tokens, a look at golf is helpful. Golfers used tokens long before bitcoins and blockchains existed. In order to practice golf shots on the driving range, a golfer has to first purchase a token in the club house. Golf clubs generate physical tokens. The token is a coin. The token can be inserted into a ball machine on the driving range. For one token, the golfer gets about 25 driving range balls. The golfer can use the driving range and the driving range balls for practice shots. The driving range balls may not be taken along and played on the course. The economic function of the driving range tokens is the use of the driving range for practice shots. The issuance of tokens is generally subject to Swiss value added tax at the time of issuance. A taxable supply of a service exists. A particularity of tokens is that each golf club generates its own token. Only the token created by the golf club can be inserted in the ball machine on the driving range. Tokens generated by other golf clubs are not accepted. 3. General Meeting of the IFA Swiss Branch on February 8, Considerations of representatives of tax administrations and first settings of the course At the extraordinary General Meeting of the Swiss Branch of the International Fiscal Association (IFA) on February 8, 2018 in Basel, representatives of the Federal Tax Administration (Franco Gennari, Head, Division Securities and Financial Derivatives; Ralf Imstepf, Head, Legal Division, Main Division Value Added Tax), the Tax Administration of the Canton Zug (Guido Jud, Head, Tax Administration) and the Tax Administration of the Canton Zurich (Thomas Gammeter, Head, Division Securities) presented considerations on the tax treatment of ITOs and tokens regarding federal income tax (direkte Bundessteuer), federal withholding tax (Verrechnungssteuer), federal stamp duties (Stempelabgaben) and federal value added tax (Mehrwertsteuer) for the first time in cooperation with the Swiss IFA-Branch (Maurus Winzap; Stefan Oesterhelt; Remo Schmid). The purpose of the extraordinary General Meeting was to solidify the tax law provisions, suggest appropriate principles for the tax treatment of ITO and tokens for discussion, and to set the first course for Swiss tax practice. 3 See Alexsandra Bal, Blockchain, Initial Coin Offerings and Other Developments in the Virtual Currency Market, IBFD Derivative & Financial Instruments (2018).

3 TAX PROFILE Preparation of guidelines The tax practice of ITOs and tokens will further develop and solidify. It is expected that the Federal Tax Administration and Cantonal Tax Administrations will publish guidelines regarding federal income tax (direkte Bundessteuer), federal withholding tax (Verrechnungssteuer), stamp duties (Stempelabgaben) and value added tax (Mehrwertsteuer). At the present time not all tax issues have yet been identified and answered. A committee of the Main Division Value Added Tax of the Federal Tax Administration is presently developing an internal draft of guidelines in order to facilitate the application of the place of supply principle (Empfängerortsprinzip). In particular, the Swiss VAT treatment of the issuance of utility tokens and hybrid tokens and the transfer of such tokens (i.e., the transfer of a bundle of contractual rights and liabilities) raise complex VAT issues that still have to be analysed. 4. Three levels: issuer, investors and employees In order to analyse the Swiss tax treatment of ITOs and tokens, three levels have to be distinguished: 4.1. Issuer The issuer is often a start-up enterprise in the legal form of a corporation or sometimes a foundation. In practice, the foundation is not often used due to its legal rigidity in Swiss foundation law. 4 Further, an exemption from federal income tax and cantonal/cantonal income and capital taxes is often not available because the public benefit requirement is not fulfilled. In the field of Swiss business taxation, the assessment of taxable income of legal entities follows the statutory financial accounts (principle of linkage). The tax treatment of ITOs at the level of the issuer initially follows, therefore, the provisions on financial accounting and financial reporting law. In particular, the provision on accrual and the provision on matching of revenue and cost, the provision on balance sheet eligibility, and the provision on valuation of assets and liabilities have to be taken into account. Subsequently, Swiss tax law provisions may amend the statutory income upwards if an expense for accounting purposes does not qualify as a business expense for tax purposes Investors At the investor level, business investors and private investors have to be distinguished: (a) Business investors Business investors may be legal entities, partnerships or sole proprietorships. The duty to keep financial accounts and to prepare financial reports applies to sole proprietorships and partnerships that have achieved revenue of at least CHF 500,000. The principle of linkage is applicable analogously. If the revenue threshold is not achieved, only financial accounts on income and expenses and on the financial situation must be kept. ff., Naskar/Pasquier, The Tale of Swiss ICO Foundations: Advantages and Limitation in the Choice of the Adequate Legal Form, AJP (2018) 89

4 TAX PROFILE 4 The Federal Tribunal has established case law to distinguish self-employment activity from private asset administration (real estate trading, securities trading, art trading, participation trading, etc.). The Federal Tax Administration has outlined the tax practice on securities trading in Circular No. 36, dated July 27, Contrary to a view that is sometimes held, the differentiation between self-employment activity and private asset administration is at issue in the context of the acquisition, holding and selling of tokens, and, according to the author s view, the case law on securities trading is most appropriate. (b) Private investors Private investors are individuals. The tax treatment of tokens follows the tax law provisions on movable private assets. The Federal Tax Administration has outlined the tax practice on bonds and financial derivatives in Circular No. 15, dated October 3, In particular, with regard to asset tokens, the legal analysis as to whether the investor has a right for repayment (so that a bond exists) is important for qualification for Swiss tax purposes Employees The tax treatment of tokens follows the tax law provisions for employment income, in particular those on the taxation of employee participations. The Federal Tax Administration has outlined the tax practice on qualifying (echte) and non-qualifying (unechte) employee participations in Circular No. 37, dated July 22, According to the view of the Tax Administration of the Canton Zurich, tokens that are granted by the issuer to employees may qualify as non-qualifying (unechte) employee participations. The issuer has to issue a certificate of the non-qualifying (unechte) employee participations at the time of the grant of the tokens. 5. Legal analysis of the legal relationship as starting point 5.1. Time of creation and transfer of tokens Tokens that are generated on an existing blockchain can be put into circulation immediately at the time of fundraising. At the time of fundraising, the issuer can also simply promise or announce that tokens will be transferred to the investors at a later time and that the tokens and the underlying blockchain have to be developed first. Tokens are generated often on an existing blockchain, in particular the Ethereum blockchain Classification according to financial reporting (Kogens/Luchsinger Gahwiler) At the level of the issuer, the ITO can cause a booking entry in the assets, the debt, the equity, the expenses and/or the revenue. Following the financial reporting of ITOs, Kogens/Gahwiler have developed the following token framework: 5 Coins as crypto currency (virtual currency): The issuer has vis-à-vis the token holder no obligation to a particular payment or a particular delivery of goods or supply of services. The token holder can use the token as a means of payment. 5 Kogens/Luchsinger Gahwiler, How Crypto-Tokens qualify under Swiss law: A comprehensive framework, November 23, 2017 (at froriep.ch).

5 TAX PROFILE 5 Tokens with financial benefits: Debt tokens: The issuer has an obligation to the token holder to repay the paid amount and, if applicable, to pay interest. Equity tokens: The issuer has no obligation to the token holder to repay the paid amount. The token holder has the right to participate in a proportion of the annual profit and/or the liquidation proceeds. Participation right tokens: The issuer has no obligation to the token holder to repay the paid amount. The token holder has the right to participate in a proportion of a particular success measure of the issuer (e.g., EBIT, licence revenue). Utility tokens: Tokens can embody many different functions, in particular other than payment and finance functions (e.g., delivery of goods, supply of services, performance of mandates, holding of legal title, etc.). The issuer generally has no obligation to the token holder to repay the paid amount. The paid amount represents generally the consideration for the delivery of goods or the supply of services. A token in the sense of this framework is a digital marker that is linked to a financial benefit or another purpose. The token serves as the identification of the parties of the legal relationship Classification according to economic function (FINMA) The Swiss Financial Market Supervisory Authority (FINMA) has developed a token framework that follows the economic function of the token: 6 Payment tokens are accepted as a means of payment or serve as a means of money or value transfer (cryptocurrencies) and do not stipulate rights towards the issuer. Utility tokens provide access to a digital platform or a digital service that is provided by means of a blockchain-based infrastructure. Asset tokens represent financial assets and can embody a debt or equity relationship with the issuer. The issuer may promise participation in a proportion of a particular success measure of the issuer (earnings or capital flows). The token can represent a share, a bond or a derivative instrument in terms of its economic function. Hybrid tokens can be utility or asset tokens that fall at the same time into the category of payment tokens. Due to the different forms of ITOs and tokens, both token frameworks are useful for the legal analysis of the legal relationship between the issuer and the token holder. 6. Analysis of the tax risks of the issuer The issuer may enter into a commitment with the token holder to pay a particular amount or to deliver a particular good or to supply a particular service. Such additional obligations of the issuer have to be analysed with regard to federal income tax (direkte Bundessteuer), federal withholding tax (Verrechnungssteuer), federal stamp duties (Stempelabgaben) and federal value added tax (Mehrwertsteuer). Swiss tax risks of the issuer may be embedded in such additional obligations. Therefore, tokens have to be qualified for tax purposes at the time of the ITO. The Swiss tax risks may arise in particular if the issuer is a taxpayer. 6 Swiss Financial Market Supervisory Authority (FINMA), Guidelines for enquiries regarding the regulatory framework for initial coin offerings (ICOs), February 16, 2018.

6 TAX PROFILE Issuance stamp duty The issuance of shares by corporations and contributions to capital reserves by shareholders is subject to issuance stamp duty. The corporation has to pay the issuance stamp duty at a rate of 1% on the issuance amount of the shares or the contributed amount respectively to the Federal Tax Administration. The issuance stamp duty is in particular at issue in the case of asset tokens Turnover stamp duty Corporations become subject to turnover stamp duty as securities dealers if their latest balance sheets show taxable securities of more than CHF 10 million. The turnover stamp duty is in particular at issue where the issuer holds its own asset tokens Withholding tax The payment of interest on bonds that qualify as collective financing schemes and dividends on shares are subject to withholding tax. The corporation has to withhold tax at the rate of 35% from the gross amount at the time of payment and to transmit it to the Federal Tax Administration Value added tax The delivery of goods and the supply of services for consideration may be subject to value added tax, if the place of delivery or place of supply is in Switzerland. The issuer must transmit the value added tax of 7.7% on the amount of the consideration to the Federal Tax Administration. At the time of invoicing, the issuer may contractually charge the value added tax to the recipient Source taxation and social security contributions In the context of granting tokens to employees, a risk may also arise with regard to source taxation and social security contributions. The granting of tokens has to be analysed from the point of view of employee participations Tax compliance: qualification for tax purposes at the time of the ITO The issuer must know its Swiss tax law obligations in the context of the ITO and must fulfil these obligations in accordance with Swiss tax law. The tokens must be qualified for tax purposes at the time of the ITO. The issuer must know whether the funds from the ITO have to be accounted for as revenue, the creation of the tokens is subject to issuance stamp duty, the payments to the token holders are subject to withholding tax, and the delivery of goods and the supply of services are subject to valued added tax. The issuer must also know whether any tokens granted to employees are subject to source taxation and social security contributions. These tax risks are at issue in particular because of the practical obstacles presented to the subsequent reclaiming of the withholding tax, the value added tax, the source tax and the social security contributions.

7 TAX PROFILE 7 7. Tax treatment of ITOs and tokens The purpose of this section of the paper is to discuss and analyse the Swiss tax practice that was presented by representatives of Swiss tax administrations in cooperation with the Swiss IFA-Branch on February 8, 2018 and the examples presented in a broader context. For that reason, the Swiss taxation of ITOs and tokens are discussed and analysed by use of the following three examples of Gennari/Imstepf/Jud/Gammeter/Winzap/Oesterhelt/Schmid: 7 Participation rights token: Right to a proportion of EBIT; Participation rights token: Right to a proportion of licence revenue; and Utility token: Right to an activity of the issuer Participation rights token: right to a proportion of EBIT (a) Facts The issuer is a start-up enterprise in the legal form of a corporation and wants to finance the development of a robot with an ITO. The issuer hopes to generate profits from the sale of the robot. In the context of the ITO, the issuer generates 20 million Participation rights tokens at CHF 1 per token by means of a Smart Contract implemented on the Ethereum Blockchain. The tokens are put into circulation at the time of fundraising. The investors pay the issuance amount in Ether. At the time of payment, the Ether amount is converted into CHF through a broker. The issuer commits in the Terms of Token Sale to pay 30% of a positive EBIT each year in Ether to the token holders through the Smart Contract in proportion to the percentage share held to the total number of Participation rights tokens. The issuer does not commit to the token holder to repay the Ether amount paid. The Participation rights token shall be tradeable on a crypto exchange. (b) Legal analysis and qualification for tax purposes The legal relationship between the issuer and the token holder is a contractual relationship that does not provide a repayment right to the token holder. The payments of the issuer to the token holders depend on the annual EBIT of the issuer. The legal relationship between the issuer and the token holder is not a sale, an exchange, a loan, a jouissance right, or a usufruct. It may, however, be regarded as a financial derivative. According to the view of the Federal Tax Administration, the financial derivative qualifies as an instrument sui generis similar to an open-ended share certificate as the underlying payment is based on the annual EBIT of a corporation. (c) Tax treatment At the level of the issuer, the Ether amount paid by the investors with a value of CHF 20 million has to be accounted for as assets at cost and as taxable revenue. Afterwards, the Ether amount is exchanged for CHF 20 million. The exchange is not recognised in the profit and loss statement (exchange of assets). A gift granted by the investor would be qualified as a contribution into capital reserve of the issuer and not recognised in profit and loss statement. However, the investor has generally no wish to donate (animus donandi). 7 Gennari/Jud/Oesterhelt/Winzap, Initial Coin Offerings (ICOs), Handout, International Fiscal Association, Swiss Branch, Extraordinary General Meeting, February 8, 2018, Basel; Schmid/Gammeter, Steuerfolgen Ebene Mitarbeiter, Handout, International Fiscal Association, Swiss Branch, Extraordinary General Meeting, February 8, 2018, Basel; Ralf Imstepf, Aspekte der mehrwertsteuerlichen Behandlung von Kryptowährungen, Handout, International Fiscal Association, Swiss Branch, Extraordinary General Meeting, February 8, 2018, Basel.

8 TAX PROFILE 8 According to the view of the Tax Administration of the Canton Zug, the commitment of the issuer to use the funds raised as an expense in the development of the product may give reason to account for a tax-deductible provision of the same amount. According to the author s view, this financial accounting that is recognised for tax purposes may be established with the principle of accrual and principle of matching of revenue and cost. On the one side, expenses and revenue do not have to be accounted for in the period in which the payment occurs or the funds are received. Expenses and revenue have to be accounted for in the period in which they are economically accrued (principle of accrual). On the other hand, expenses that aim to generate revenue have to be allocated to the respective revenue stream (principle of matching of revenue and cost). In case of an ITO, this principle may result in expenses being advanced to the period in which the respective revenue has to be accounted for. According to the view of the Federal Tax Administration, the funds are not subject to issuance stamp duty, nor to turnover stamp duty and, as an exempted turnover, not to value added tax. The provision has to be unwound over time and set off against the developing expenses. After completion of the product development, a profit, a loss or a balanced result may result from the fundraising. The payments to the token holders are accounted for as tax-deductible expenses and, according to the view of the Federal Tax Administration, are not subject to withholding tax. The payments are not interest, dividends, income from units in collective investment schemes, or interest on bank deposits. At the level of the business investor, there is an income tax-free exchange of assets at the time of the generation of the tokens. The Participation rights tokens have to be accounted for as assets at cost. The payments by the issuer and the capital gains from the sale of the tokens have to be accounted for as taxable revenue. At the level of the private investor, there is an income tax-free exchange of assets at the time of the generation of the tokens. According to the view of the Tax Administration of the Canton Zug, contrary to a view that is sometimes held, the Participation rights tokens have to be declared in the Swiss tax return as securities and not as other assets. The Federal Tax Administration establishes the wealth tax base for most important crypto currencies and provides a list to the Cantonal Tax Administrations and taxpayers. With regard to the valuation of tokens, the tax practice has to develop appropriate valuation rules. The payment of the issuer is taxable investment income. There is no tax-free income in the amount of the paid amount to the issuer. Capital gains from the sale of the tokens are tax-free capital gains. According to the view of the Federal Tax Administration, the Participation rights tokens qualify as taxable securities for turnover stamp duty purposes. The transfer of tokens for consideration is subject to turnover stamp duty if a securities dealer is a contractual party or intermediary in accordance with the stamp duty law. The Federal Tax Administration establishes the qualification of the tokens as taxable securities on the grounds that the tokens qualify as sub-participations of shares issued by a corporation. On the same basis, the Federal Tax Administration also considers the generation of the tokens to be exempt from turnover stamp duty: the issuance of sub-participations of shares issued by a corporation is exempt from turnover stamp duty. The transfer for consideration as an exempted turnover is not subject to value added tax.

9 TAX PROFILE 9 In plain language, the qualification as an instrument sui generis similar to an open-ended share certificate establishes a sub-participation of shares issued by a corporation and, therefore, a taxable security. It remains to be seen whether this qualification will be of significance in practice as the transfer for consideration is only subject to turnover stamp duty if a securities dealer is a party or intermediary. Stamp duty law links the charging provision to the involvement of a securities dealer (e.g., bank or other person that is involved either as party or intermediary, for instance, trading platform for tokens). At this point, tokens demonstrate the tax challenges of the digital economy for the legislator. Whether Participation rights tokens with an underlying right to the annual EBIT of a corporation qualify as taxable securities has to be further analysed. The financial underpinning of a share is not EBIT, but rather the annual profit and/ or the liquidation proceeds Participation rights token: right to a proportion of licence revenue (a) Facts The issuer is a start-up enterprise in the form of a corporation and wants to finance the development of software with an ITO. The issuer hopes to generate licence revenue from the licencing of the software. In the context of the ITO, the issuer generates 10 million Participation rights tokens at CHF 1 per token through a Smart Contract that is implemented on the Ethereum Blockchain. The tokens are put into circulation at the time of fundraising. The investors pay the issuance amount in Ether. At the time of payment, the Ether amount is converted into CHF through a broker. The issuer commits in the Terms of Token Sale to pay 20% of the licence revenue each year in Ether to the token holders through the Smart Contract in proportion to the percentage share held by the token holder to the total number of Participation rights tokens. The issuer does not commit to the token holder to repay the Ether amount. The Participation rights token will be tradeable on a crypto exchange. (b) Legal analysis and qualification for tax purposes According to the view of the Federal Tax Administration, the legal relationship between the issuer and the token holder qualifies as a financial derivative that in turn qualifies as an instrument sui generis similar to an open-ended share certificate. The underlying value is the annual licence revenue. (c) Tax treatment The tax treatment of the ITO and the Participation Rights Tokens corresponds to the analysis in Paragraph 7.1.(c).

10 TAX PROFILE Utility token: right to an activity of the issuer (a) Facts The issuer is a start-up enterprise in the form of a foundation and wants to finance the development of software (Open Source Blockchain Protocol) with the financial support of investors. The issuer wants to release the software through an open source licence and does not hope to generate profits from the development. The purpose of the foundation is the development and the release of the software. The issuer receives Bitcoin and Ether in the amount of CHF 50 million from investors that are converted into CHF through a broker. Access to the Open Source Blockchain will not be possible without utility tokens. On the development and release of the software, the issuer commits to generate CHF 100 million of utility tokens and to record on the Open Source Blockchain a proposal to allocate the utility tokens to the investors. The issue, therefore, announces that tokens will be transferred to the investors at a later time. The utility tokens that may be generated at a later time shall be tradeable on a crypto exchange. (b) Legal analysis and qualification for tax purposes The issuer must use the funds received for the purpose of the foundation, which is the development and release of the software. There are no further commitments by the issuer to the investors. The issuer does not commit to develop and to release the software successfully, or that the allotment of the utility tokens to the investors will occur according to the proposal. The legal relationship between the issuer and the investors is not a sale, an exchange, a loan, a jouissance right, or a usufruct. According to the view of the Federal Tax Administration, it may be regarded as a mandate. The mandate consists of the activity of the issuer, i.e., the development and the release of the software and the proposal according to which the allotment of the utility tokens is proposed to the investors. (c) Tax treatment An exemption from federal income tax and cantonal/cantonal income and capital taxes seems to not be available because the public benefit requirement is not fulfilled. At the level of the issuer, the Ether and Bitcoin amount with a value of CHF 50 million paid by the investors has to be accounted for as assets at cost and as taxable revenue. Afterwards, the Ether and Bitcoin amount is converted into CHF 50 million. The conversion is not recognised in the profit and loss statement (exchange of assets). According to the view of the Tax Administration of the Canton Zug, the commitment of the issuer to use the funds as an expense in the development and the release of the software may give rise to a tax-deductible provision of the same amount. The financial accounting and reporting and the tax treatment correspond to the analysis in Paragraph 7.1.(c). The fundraising through the foundation is not subject to issuance stamp duty or to turnover stamp duty. According to the view of the Federal Tax Administration, the activity of the issuer may be regarded as entrepreneurial activity so that the issuer may become subject to value added taxation. A taxable supply of a service exits. The service of the issuer is the activity in accordance with the mandate and the consideration is the funds received. The turnover from the funds is subject to value added tax at the time of the ITOs if the place of supply is in Switzerland, i.e., if the place of domicile or seat of the investor is in Switzerland. The issuer must remit value added tax at a rate of 7.7% on the taxable turnover to the Federal Tax Administration. According to the place of supply principle (Empfängerortsprinzip), the supply of services to recipients abroad is not subject to Swiss value added tax. The issuer bears the burden of proof that the domicile or the seat of the investor respectively is abroad. As a VAT taxpayer, the issuer is entitled to claim input VAT and import VAT that are related to development expenses.

11 TAX PROFILE 11 The provision has to be unwound over time and accounted for against the development expenses. This financial accounting is recognised for tax purposes. According to the view of the Tax Administration of the Canton Zug, the provision has to be unwound in such a way that the foundation generates a minimum annual profit of cost + 5%. After completion of the product development, a profit, a loss or a balanced result may result from the fundraising. The allotment of the utility tokens to the investors constitutes the fulfilment of a contractual commitment. At the level of business investors, the utility tokens have to be accounted for as a cost of an asset. At the level of the private investors, there is an income tax-free event. The utility tokens are not taxable securities. The sale of utility tokens is not subject to turn over stamp duty. 8. Tax rulings 8.1. Requirements The requirements for tax rulings have increased. It is the task of the issuer to identify the legally relevant pattern of facts and to raise and answer the legally relevant questions. Questions for which answers are not held in the tax ruling will not be covered in a binding manner by the ruling due to the principle of protection of legitimate expectations. The lack of a legally relevant fact may result in the tax ruling being not binding in part or, in extremis, not at all. It is not the task of the tax administration to complete or to improve the tax ruling. The editorial responsibility is in the hands of the person seeking the ruling. The tax administration simply agrees or does not agree with the submitted tax ruling. It just stamps and signs the tax ruling filed if it agrees Development and solidification of tax practice The Swiss tax practice with regard to the taxation of ITOs and tokens will further develop and solidify. At the present time not all tax issues have yet been identified and answered. For the legal protection of the issuer, it will be important to obtain rulings on the tax treatment of ITOs and tokens from the Federal Tax Administration and/or Cantonal Tax Administrations. Tax rulings are an important instrument for tax administrations to develop and harmonise tax practice. 9. Conclusions An initial analysis of Swiss tax practice relating to ITOs has shown that Swiss law contains appropriate tax principles at the level of the issuer, the investors, and employees, and that Swiss tax practice is going in the right direction. It has also shown that the Swiss taxation framework, in particular its withholding tax provisions, are attractive in the international context to attract international investors. In practice, payments by a Swiss issuer to Swiss and foreign token holders often qualify as other payments and are, therefore, not subject to Swiss federal withholding tax.

12 TAX PROFILE 12 Tax rulings should be reviewed on a regular basis by the issuer and, if appropriate, supplemented and amended if the ruling does not answer all legally relevant questions and therefore is incomplete, and/or if tax risks were not identified, or the current tax practice is more advantageous than that in the ruling. Let s go back to our golfer: In the near future, golfers will no longer have to first go to the club house and purchase tokens using legal currency and insert the tokens in the ball machine on the driving range. Instead, he or she will go directly to the driving range, tap their smart phone on the ball machine, pay with digital tokens generated by the golf club, and start practising. The end result will be identical, but the means of arriving at it radically different. TAX PROFILE Published twelve times per year by Wolters Kluwer Canada Limited. For subscription information, see your Wolters Kluwer Account Manager or call or (416) (Toronto). For Wolters Kluwer Canada Limited Tara Isard, Senior Manager, Content Natasha Menon, Senior Research Product Manager Tax & Accounting Canada Tax & Accounting Canada (416) ext (416) ext Tara.Isard@wolterskluwer.com Natasha.Menon@wolterskluwer.com Wolters Kluwer Canada Limited Sheppard Avenue East Toronto ON M2N 6X tel fax 2018, Wolters Kluwer Canada Limited TAP