No amendments in Tax Law regarding DLT/Blockchain

The report of the Federal Department of Finance concludes that the tax law needs no amendment regarding Blockchain and distributed ledger technology.

On 7 December 2018, the Federal Council had decided to examine the need to adapt tax law to developments in distributed ledger technology (DLT/blockchain). Followed by the consultation of the diverse interest groups, including the crypto industry and respective advisors with the Swiss Tax Authority on Tuesday, 10 December 2019, the examination concluded in the now published report of the Federal Department of Finance on Friday, 19 June 2020. The report identifies that no particular legislative amendments to tax law are necessary. Due to its technology and business neutral nature, Switzerland's tax framework is already appropriate and attractive for blockchain projects.

The current tax system has proved its worth for taxes on income, profits, wealth, and capital. Therefore, there is no apparent need for legislative action in these areas. 

Regarding the withholding tax, the high circulation and capital market capability of equity and participation tokens (i.e., asset tokens which are not considered taxable securities under current legislation), as well as securing tax revenue, generally speak in favor of levying the withholding tax on income from those tokens. Although there is a justification for extending the withholding tax to these incomes, the FDF recommends refraining from such an extension to avoid the negative impact on Switzerland's attractiveness as a business location. Hence, only payments based on formal shares, participation certificates, fund shares, or bonds shall be subject to withholding tax, irrespective of issuing a token or classic share.

The same holds for the adjustment of the security transfer tax, especially as there is an ongoing technological development and revision of securities law, which will likely impact securities trading. Security transfer tax shall only be due if taxable securities are traded (see above), and a Swiss securities dealer is involved. The uncertainty regarding the future usage of DLT trading systems is considered too high than to adapt the Stamp Duty Act. For this reason, DLT trading systems are currently not subsumed as securities dealers under the Stamp Duty Act. 

In principle, the current VAT law offers the necessary framework to record facts based on DLT. Specific difficulties arise in the definition of a taxable supply. In addition, as the DLT is based on a decentralized anonymous approach, the counterparty might be undefined. A strict adjustment of law could be to determine all undefined supplies as domestic. However, the FDF concludes that such an amendment is not appropriate. Further, due to the implementation of KYC procedures in most ecosystems, the uncertain cases decrease. Since the associated distortions of competition are assumed to outweigh, no legal need for amendments in the VAT is determined.

Fortunately, even if developments regarding the DLT need continuously be observed, the approach, particularly concerning the withholding tax and the securities transfer tax, is a pragmatic one. So far, the prevailing tax procedures, the derived tax certainty, and the relatively low tax burden still provide optimal grounds for crypto projects to prosper in Switzerland. On the other hand, there are still some uncertainties and open questions in the practice of the tax authorities which need to be closed as soon as possible based on current legislation.

You can find the press release of the FDF report here.

July 2020 | Authors: Thomas Linder, Dr. Mira Bazlen

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