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Important news from the Value Added Tax (VAT) department: The Swiss Federal Tax Administration (SFTA) changed the VAT practice regarding the qualification of native tokens with governance function. All existing rulings concerning the qualification of such tokens are currently re-assessed. The SFTA communicates this practice change by individual letters to taxpayers who have previously obtained VAT advance rulings rather than by public announcement.

So far, the qualification for VAT purposes of native tokens with governance functions for VAT purposes has always been an uncertain area. The SFTA now obviously filled this gap. Upon request, they confirmed that governance functions per se are not considered a VATable service. Accordingly, tokens that have so far qualified as utility tokens may now be re-qualified.

Governance as primary function

In case governance activities, such as for example voting rights or the option to make proposals in the realm of a decentral protocol, are the primary or sole function of a token, they would not be considered as VATable. As a result, the token would qualify as asset which does not qualify for one of the three token categories (utility token, asset token or payment token). Overall, any fee paid for the token would classify as non-monetary value in the sense of a donation. Issuance and trading of such token would, therefore, not be subject to VAT.

In exceptional cases, a voting right may qualify as a service subject to VAT for example if it offers its holder the opportunity to economically take ownership of a protocol or to receive services only beneficial to certain individual token holders as opposed to the whole community. In such cases or where a governance function of a native token offers a defined and determinable supply of a service, the token may still qualify as a utility token.

Non-governance functions prevail

If, however, governance is not the primary function of a native token it may qualify for one of the three token categories depending on the nature of the other features attributed to it. Accordingly, in case a native token is primarily used as payment token with a governance function as auxiliary feature, the token should qualify as payment token as per the new VAT practice.

Review of all existing rulings

Upon request, the SFTA confirmed that currently all existing rulings where tokens have been qualified for VAT purposes are subject to a re-assessment. In all cases where the former qualification is not in line with the new practice the previous ruling will be revoked, and the token will be re-qualified with immediate effect accordingly. The SFTA so far did not officially publish this practice change but rather decided on communicating the amended qualification of native tokens with governance functions through individual letters addressed to token issuers in possession of an existing tax ruling in this regard.

Application as from next year/tax quarter

The amended VAT qualification will take effect immediately and will have to be applied in the following VAT period (year resp. quarter). In cases available to us where such a re-assessment took place in October/November of this year the respective tax payers will have to apply the new qualification of the token starting 1 January 2024.

In case the re-qualification of a token results in a situation benefitting a taxpayer, i.e. relieving a token from future VAT liabilities (e.g. re-qualification from a utility token in a non-monetary value), a correction can be filed for past tax periods where transactions were subject to VAT due to the past qualification of a token.

Confirm VAT registration

In case a token is re-qualified from a utility token into a token not granting any services for VAT purposes, the issuance of such a token is no longer considered as giving rise to an entrepreneurial activity of the issuer. The SFTA will ask for further information about the economic activities of the respective token issuer to uphold or revoke the existing VAT registration.

How to proceed

As this practice change has not been officially announced by the SFTA, the receipt of a letter revoking an existing ruling on a respective qualification of a native token may come as a surprise. However, there is no need for panic in case the postman rings with such news in his hands. On the one hand, the SFTA seems aware that this procedure is rather unexpected and may give rise to uncertainties on the level of the tax payers. Upon our request the respective tax commissioners were open to provide further explanations on the practice change.

On the other hand, in case you have any questions regarding the VAT qualification of a token in general or if you have received a letter from the SFTA requalifying your token and are seeking further guidance on how to proceed, we are happy to support you in identifying and pursuing the required next steps and assist you with any question there may arise.

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