The Advocate General (AG), Juliane Kokott, has given her Opinion to the European Court of Justice (ECJ) on the tax treatment of Bitcoin exchange services. In her view, Bitcoin exchange services are VAT exempt. The ECJ has not been asked to examine the tax treatment of Bitcoins or Bitcoin exchange services before. It’s not yet clear how it will respond to this Opinion; but in most cases, the ECJ follows the Opinion and reasoning of the Advocate General. It is therefore, perhaps, more likely than not that Bitcoin / fiat currency exchange services are VAT exempt, as a matter of European law.

A Swedish national, Mr Hedqvist, asked the Swedish Committee on Taxation (the Committee) whether a proposed online service for the exchange of Bitcoins into the Swedish Kroner and vice versa, would attract VAT. The price of Bitcoins would be based on an exchange rate shown on an exchange rate portal, minus a percentage to be taken by the service provider as foreign exchange commission. The Committee found that although the buying and selling of Bitcoins would be “services performed for consideration”, the service would be VAT exempt because Bitcoins are used as a legal means of payment.

The Swedish tax authorities appealed; and the Swedish court referred the following questions to the ECJ:

  1. Does Article 2(1)(c) of Directive 2006/112/EC on the Common System of Value Added Tax (the VAT Directive), which subjects “the supply of services effected for consideration within the territory of a Member State by a taxable person acting as such” to VAT, apply to the exchange of virtual currencies into traditional currencies for consideration (commission) that the provider integrates into the calculation of the exchange rate?; and
  2. If so, should any of Article 135(1)(d), (e), or (f) of the VAT Directive be interpreted as meaning that the foreign exchange transactions described above are exempt from VAT?

On the first question, the AG recognised that VAT is a tax on the final consumption of goods and that transfers of legal tender cannot constitute consideration for a taxable benefit. The AG notes that since the function of legal tender is to facilitate the exchange of goods, rather than to be consumed as goods, the transfer of legal tender or other means of payment such as Bitcoins, should not attract VAT. However the activities envisaged by Mr Hedqvist go further than transferring a pure form of payment, and constitute the supply of currency exchange services for payment, which falls within the scope of Article 2(1)(c) of the VAT Directive.

On the second question, in the AG’s Opinion, articles 135(1)(d) and (f) do not apply, and cannot therefore be relied upon to make Mr Hedqvist’s proposed services VAT exempt, because:

  • Article 135(1)(d) only applies to transactions concerning deposit and current accounts, payments, transfers, debts, cheques and other negotiable instruments”, all of which seem to represent a currency, rather than acting as a currency themselves; and
  • Article 135(1)(f) only applies to transactions in “shares, interests in companies or associations, debentures and other securities”, which represent property rights in corporations, debt instruments and securities, rather than a means for paying to acquire them. .

In considering whether Article 135(1)(e), which exempts transactions“concerning bank notes and coins used as legal tender” applies, the AG notes that the present case concerns exchanges between Swedish kroner which are legal tender in Sweden and Bitcoins which are not legal tender in any country, but can be used as a means of payment. The AG notes that it is unclear, from the different language versions of the VAT Directive, whether it is sufficient that only one rather than both of the means of payment constitute legal tender, and settles the issue by taking the purpose of the tax exemption into account.

According to the AG, the purpose of Article 135(1)(e), is to tax all currencies as little as possible in the interest of the proper conduct of payments, which would benefit the internal market insofar as cross-border services require currency conversions. Although Bitcoin is not legal tender, it is still a form of payment, and it participates in the flow of payments. A tax exemption for the exchange of Bitcoins against conventional currencies would therefore be consistent with the purpose of Article 135(1)(e).

The AG therefore recommends that the ECJ answers the Swedish court’s questions as follows:

  1. The exchange of a pure form of payment without legal tender such as Bitcoin with a currency that is legal tender such as the Swedish Kroner, at an exchange rate that takes into account the deduction of commission by the provider of the service, is a supply of services for consideration under Article 2(1)(c) of the VAT Directive; and
  2. Such operations are exempt from VAT under Article 135(1)(e) of the VAT Directive.