The Liechtenstein "Blockchain Law" (TVTG) from the perspective of tax consulting

1. entry into force and objectives of the "Blockchain Act

On January 1, 2020, the Principality of Liechtenstein has passed the law of October 3, 2019 on tokens and VT service providers (TVTG)01 came into force. "VT" stands for "trustworthy technology." In public, this law is known simply as the Blockchain Act. It is one of the aims of the TVTG to regulate issues such as Initial Coin Offering (ICO) and Security Token Offering (STO). Furthermore, the law clarifies basic legal issues in connection with block chain technology and the related areas of application. Furthermore, the special feature of the TVTG is that the Act has provided an abstract definition of this technology. This means that future generations of technology can also be subsumed under it. For this reason, the TVTG uses the term "transaction systems based on trustworthy technologies".02 used for block chain systems.

This article first outlines the basic features of the TVTG, and then presents the individual VT services. Subsequently, the special features resulting from the application of the VT systems are analysed with regard to accounting and tax assessment.

2. the TVTG at a glance

2.1 Preliminary remarks

On 3 December 2019, the Act of 3 October 2019 on Token and VT Service Providers ("Token and VT Service Provider Act"; TVTG) was published in the State Law Gazette (LGBl No. 2019.301). According to Art. 1 of the TVTG, the object and purpose of this law is to establish a legal framework for transaction systems based on trustworthy technologies. In particular, it regulates the following:

• the civil-law principles relating to tokens, the representation of rights by means of tokens and their transfer;
• the supervision and the rights and obligations of VT service providers.

The purpose of the TVTG is to ensure confidence in digital legal transactions (especially in the financial and economic sector), to protect users on VT-Systems and to create optimal, innovation-friendly and technology-neutral framework conditions for the provision of services on VT-Systems.

2.2 Brief overview

According to Art. 11 Para. 1 of the TVTG, the TVTG applies only to those service providers who have a registered office or residence in Liechtenstein. Only Liechtenstein service providers are therefore covered and regulated. Furthermore, Art. 12 para. 1 of the TVTG specifies that a registration obligation exists in principle only in the case of professional practice. Professional means that a fee is received for the provision of the service.03 Favourable services therefore do not entail an obligation to register. According to Art. 12 Para. 2 TVTG, persons who issue tokens in their own name or not professionally for third parties are an exception to this rule. These are nevertheless subject to registration if tokens worth CHF 5 million or more are issued within 12 months.

A milestone of the TVTG is the introduction of the term "token". According to Art. 2 para. 1 let. c TVTG, this term refers to information on a VT system, e.g. the Ethereum Blockchain, which can but does not have to represent any rights (e.g. a right of ownership or right of use). Accordingly, Bitcoins, which are known not to represent any rights, are also considered tokens.

2.3 The VT services

2.3.1 Token issuer

Token issuers are persons who issue tokens either themselves or for third parties. The TVTG only covers the so-called "public offers". A public offer exists "if a communication with the aim of selling tokens to users is directed to a circle of addressees who are in principle intended to be unrestricted".04.

A public offer does not exist, for example, if tokens are only issued to employees of a certain company or participants of a certain event. On the other hand, the answer is affirmative if anyone can acquire a token.

2.3.2 Token Generators

Tokens must be created in each case. A token creator does exactly this. The token then already exists, but has not yet been issued. It is usually held in the issuer's wallet until the time of issue.

As shown at the beginning, tokens can represent a wide variety of rights, such as the right to use a car. Token creators must ensure that these rights are represented correctly in the token. They must also ensure that the token effects the disposal of this right and at the same time prevents any competing disposal.05

In the case of a tokenized right of use for a car, the token issuer must therefore ensure that the token actually contains the desired right of use. If the token is transferred to another person, this person must also acquire the right of use.

2.3.3 VT Key Depository or VT Token Depository

VT token custodians and VT key custodians hold tokens and private keys for their customers, whereby the private keys can be used to move the tokens. In order to be considered a service provider subject to registration, the length of the holding is not important. Rather, a token custodian is someone who allows tokens from customers to flow through his wallet ("flow-through transaction").

If a token is placed in safekeeping with a VT service provider, it is transferred to a wallet to which the VT service provider, not the customer, has access. The actual owner of the token therefore loses her power of disposal and must give the token custodian instructions on how she wishes to use her token. The role of the token custodian is therefore similar to that of a bank. He must ensure that his private keys, which he could use to move the customer's tokens, are not misused or lost. He must also ensure that he knows at all times which tokens are to be allocated to which customer (Art. 17 para. 1 let. d TVTG).

If VT keys (private keys) are given to the custodian, it is quite possible that both the custodian and his customer retain de facto power of disposal over the tokens. It is possible that the custodian is only given a copy of the private key for safekeeping. The VT key custodian must therefore also take measures to prevent the keys held in safekeeping from being misused or lost (Art. 17 para. 1 let. c TVTG).

2.3.4 VT protector

VT-Protectors hold tokens belonging to customers in their own name and on behalf of others, but without disclosing their representation. According to the report and application for the TVTG, VT protectors provide typical trust services. They therefore require a licence in accordance with the Trustee Act06.07

2.3.5 Physical Validators

Physical validators are persons who ensure the contractual enforcement of rights to property represented in tokens in accordance with property law. According to the report and application to the TVTG No. 59/2019, physical validators have to ensure or are responsible for

• the item in question is correctly identified (e.g. by recording a serial number)
• the principal of the token generation is the rightful owner of the rights to objects to be tokenized and can also dispose of these objects; and
• the respective owner of the token can actually assert the rights represented in the token

2.3.6 VT exchange service providers

At VT exchange service providers you can exchange your tokens for other tokens or money. A well-known example of this are change machines for crypto currencies, which can be found in many places. VT exchange service providers must also inform their customers of the prices at which they buy and sell tokens. In order to make these prices comparable, prices of the same token must also be made available in other markets.08

2.3.7 VT test stations

VT test centres are persons who check the legal capacity and the requirements for the disposal of a token. They are therefore service providers who check on behalf of a third party whether a customer may use a token.

If, for example, a token is issued within the framework of a festival with which alcohol can be purchased, then the person who ensures that only persons of legal age can use this token would be considered to be the inspection body.

2.3.8 VT price service provider

VT price service providers provide "aggregated price information" on the basis of offers to buy and sell or completed transactions.09

"Aggregated price information means the average buying or selling price of the transactions concluded on a VT system with regard to tokens, which is measured, for example, on the basis of the trading transactions concluded using a matching platform".10

The legislator's aim was to group operators of certain trading platforms for tokens in this service category.11 In any case, a VT price service provider is not one who merely refers to the exchange rates of other service providers by stating the source.

2.3.9 VT identity service providers

VT identity service providers are persons who identify the holder of a token and enter it in a register (art. 2 para. 1 let. t TVTG).

3. special accounting features

3.1 Preliminary remark

At the beginning of May 2019, the Crypto Valley Association (CVA) and Expertsuisse jointly published a document dealing with selected questions and answers on the accounting treatment of Bitcoin and Initial Coin Offerings (ICO) in financial reporting under the Swiss Code of Obligations (OR).12

This document was revised and supplemented in September 2019. Although the Swiss Code of Obligations (OR) is exclusively relevant for Swiss accounting and has no binding effect on the Principality of Liechtenstein, in practice Liechtenstein auditors in particular orient themselves strongly towards the publications of Expertsuisse. This is because Expertsuisse is an association of experts for auditing, taxes and trusts. In addition, Expertsuisse trains, supports and represents the federal certified accountants. Most of Liechtenstein's certified public accountants also hold a federal diploma and are members of this association. For this reason, Expertsuisse's recommendations are presented below.

Expertsuisse has dealt extensively with the accounting treatment of Bitcoin. At the same time, Expertsuisse also states that the following principles apply exclusively to Bitcoin and Bitcoin Cash. This means that even for other known crypto currencies such as Ethereum, Litecoin, Dash and Neo, these principles cannot be adopted without verification.

3.2 Basic approach

In order to capitalize an asset in the balance sheet, it must be capable of being capitalized in both abstract and concrete terms (recognition on principle). The abstract capitalization capability is fulfilled if the asset can be valued and used individually. The concrete ability to capitalize is fulfilled if there is no concrete prohibition to capitalize the asset in the balance sheet.

In the first step, Expertsuisse determines that Bitcoin meets the activation requirements. In the second step, it is examined under which balance sheet item it would be appropriate to report Bitcoin. In this context, a distinction must be made in particular according to the intended use and the object of the company. In principle Expertsuisse favors an approach under the balance sheet item "Securities". A distinction is to be made here between short-term and long-term holding intentions. In the case of a short-term holding intention, the Bitcoins are to be reported as securities under current assets and in the case of a long-term holding intention, the recognition of Bitcoins as securities under financial assets is appropriate.13

A special situation arises if the holding company regularly trades in Bitcoin in the course of its ordinary business. In such a case Expertsuisse recommends that the item be reported as stocks.14

3.3 Amount approach

Once the conditions for capitalization have been met (recognition on principle), the amount of the asset's carrying amount is determined (recognition on principle). According to Expertsuisse, there is a choice between valuation at the cost of acquisition (lower of cost or market principle) or valuation at stock market prices or observable market prices. The use of the official prices of the Swiss Federal Tax Administration is not mandatory in this context. Expertsuisse also expressly permits the use of its own market valuations based on effective transaction prices. Furthermore, Expertsuisse makes it clear that transaction fees, similar to brokerage and bank fees, are normally to be recorded as expenses, although capitalisation as part of the acquisition costs is also permitted.15

If Bitcoin is recognized as inventories, there is again an option to choose whether to account for it at cost or at observed market prices. Expertsuisse expressly mentions the FIFO (first-in, first-out) method and the weighted average method for determining acquisition costs, although this is not an exhaustive presentation of the permissible methods, but is rather referred to as "typical" methods.16

4. value added tax

4.1 Preliminary remark

The 1923 Customs Treaty between Liechtenstein and Switzerland17 involves the creation of a common customs area and thus concerns the movement of goods and, in particular, customs matters. Based on the customs treaty, Switzerland and Liechtenstein have concluded a value added tax treaty18 and the VAT agreement19 decided to introduce value added tax in Liechtenstein in parallel with Switzerland. The treaty and the agreement came into force on 1 January 1995.

The Value Added Tax Treaty states that Liechtenstein shall incorporate the substantive provisions of Swiss value added tax law into its national law.20 How this is to be done will be specified in the VAT agreement. Appendix I of the VAT Agreement sets out the substantive provisions of the Swiss VAT Act21 must be incorporated into Liechtenstein law. For this reason, the practical consultations by the Consultative Committee of the Federal Department of Finance are also of great importance for Liechtenstein and are de facto binding for the administration.

A first draft on the tax treatment of crypto currencies was published on 21 June 2018. This was replaced by a revised first draft on 29 January 2019. Based on various proposals for adjustments, a second draft was published on 20 May 2019. As a result, on 17 June 2019 the Federal Tax Administration (FTA) amended the following publications on the basis of this second draft with effect from 1 June 2019 - to define the VAT treatment of cryptocurrencies:22 ‍

4.2 Classification of crypto currencies

The TVTG understands tokens abstractly as information on a VT system, which can represent any rights (e.g. a right of ownership or right of use). In contrast, the FTA distinguishes between three main types of cryptocurrency with regard to the VAT classification.

4.2.1 Payment coins/token

Payment coins within the meaning of the VAT Act may be used exclusively as means of payment for the purchase of supplies and/or services from one or more suppliers. They therefore do not entitle the customer to receive specific or determinable services, but only represent the agreed means of payment.

4.2.2 Utility Coins/token

In contrast to payment cookies, usage cookies entitle the user to receive certain and precisely definable services and/or grant a right of access to a platform, an application or licenses and/or license-like rights.

4.2.3 Investment coins/token (so-called asset backend coins/token)

Investment coins/token convey an entitlement to a share of profits, sales or even a certain portion of sales, as well as to derivative rights or similar. The Practice Draft also stipulates that voting rights/co-determination rights securitised in the coin do not constitute independent VAT services with regard to the further development of the respective block chain and therefore have no influence on the assessment of the coin/token.

4.3 The TVTG from a VAT perspective

Nine VT services introduced by the TVTG in Liechtenstein were presented at the beginning. Since the TVTG is an original Liechtenstein approach to regulating block chain technology, the FTA has not (yet) assessed the VT service providers from a VAT perspective. Nevertheless, from the publications to date, especially in Info Brochure 4 on token issuers23The official viewpoint of the VT exchange service providers and the VT key custodians is presented below:

4.3.1 Token issuer

In the Principality of Liechtenstein, there is no publication by the tax administration on the VAT treatment of the various VT service providers and thus also not on the token issuers. As shown above, token issuers are persons who issue tokens either themselves or for third parties. In this context, we also speak of Initial Coin Offerings (ICO) or Token Generating Events (TGE). These are financing models in which new crypto currencies are issued against other crypto currencies, such as Bitcoin and Etherum, or fiat money. The whole thing is similar to an Initial Public Offering (IPO), in which investors acquire shares in a company. For the VAT assessment of an ICO/TGE, it is of central importance that the functionality of the coins/token is analysed and accordingly classified in the FTA definition scheme presented.

• Usage Coins/Token:
  The FTA is based on Art. 40 (1) (c) of the VAT Act in connection with the VAT treatment when issuing Coins/Token. Accordingly, the advance payment for certain or at least at the time of the ICO/TGE determinable future services and services without invoicing is taxable upon receipt of the payment. The FTA assumes a certain or determinable, taxable performance if usage fees/token are issued against payment. The coins/token thus represent an (access) functionality/license within a system.
• Payment coins/token:
  The issue of payment coins/token for a fee constitutes an exchange of means of payment that is not relevant for VAT purposes.
• Investment coins/token:
  The investment coins/token are based on Art. 21 para. 2 no. 19 letter e VAT Act. Accordingly, the issue of these coins or tokens for a fee is exempt from tax.

4.3.2 VT exchange service providers

The first step in the VAT treatment of trading and brokering of coins/tokens is also to assess the respective coins/tokens. The purchase and sale of payment coins/token is - analogous to foreign exchange trading - exempt from tax under Art. 21 para. 2 no. 19 lit. d VAT Act. Trading in investment and usage coins and tokens constitutes a service provided in one's own name, which is to be treated for VAT purposes as an independent service according to the content of the service contained in the cryptocoin/token.

Purchases and sales of investment coins/token are, according to the regulations in the area of securities, book-entry securities and derivatives, exempt from tax under Art. 21 para. 2 no. 19 lit. e VAT Act. Furthermore, purchases and sales of usage fees/token constitute taxable services, provided that the place of performance of the service contained in the cryptocoin/token is within Switzerland and no tax exemption pursuant to Art. 21 para. 2 VAT Act applies.

It is also of central importance to differentiate between whether a trading platform is involved or only the provision of a technical marketplace. According to the FTA, the operation of a trading platform and the mutual transfer of the traded cryptocoins/token - depending on the functionality of the mediated cryptocoins/token - is a taxable or exempt service. The well-known rule that brokerage services are based on the underlying transaction that is either taxable or exempt from tax applies here as well.

The mere provision of a technical marketplace without involvement in the transfer of cryptocoins/token and payment flows does not establish a contractual relationship between the trading platform operator and the customer. Accordingly, there is no order between the parties aimed at the acceptance and transmission or the purchase or sale of cryptocoins/token. A corresponding platform usage fee, connection fee or similar is subject to tax at the standard rate, whereby the place of supply of services is determined in accordance with Art. 8 para. 1 VAT Act.

4.3.3 VT Key Depositary or VT Token Depositary

VT token depository and VT key depository hold tokens and private keys for their customers. This is done regularly by means of so-called wallets. According to the FTA, this is a taxable process. It is therefore not dependent on what type of coins/token is stored. It should also be noted that the place of performance is based on the recipient location principle in accordance with Art. 8 para. 1 VAT Act.

4.3.4 The remaining VT services

In the author's view, the remaining VT services are clearly identifiable and controllable services. Therefore, the recipient location principle according to Art. 8 (1) MWSTG must also be taken into account here to determine the place of performance.

5. stamp duties

5.1 Preliminary remark

The Introductory Act of 13 May 1924 to the Customs Treaty with Switzerland of 29 March 1923 provides, among other things, that the Federal Tax Administration is responsible for the execution of all matters relating to stamping and collection of taxes on the territory of Liechtenstein.24 Federal stamp duties are taxes on legal transactions with certain documents. A distinction is made between three levies, namely the issue tax, the turnover tax and the tax on insurance premiums.

At the time of writing this article, the FTA has not yet published any specific leaflets, circulars or circulars concerning stamp duties and cryptographic currencies. It is therefore necessary to check whether the general legal provisions apply to the block chain issue in question.

5.2 Stamp duties and token issuers

With regard to the issue tax, this means that it must be examined whether the issue of the coins/tokens results in the creation or increase of equity capital or represents a contribution from shareholders without consideration. Only if this is the case would the scope of application for the issue tax or the formation tax be opened up.

With regard to the turnover tax, many investment coins/token qualify as taxable documents within the meaning of the Swiss Stamp Act (StG)25. It should be noted, however, that no turnover tax is regularly payable on the issue of investment coins/token, as the primary market exception applies under Art. 14 para. 1 lit. a StG.

According to Art. 14 para. 1 letter a of the StG, the issue of domestic shares, ordinary shares of limited liability companies and of cooperatives, participation certificates, dividend-right certificates, shares in collective investment schemes according to the Collective Investment Schemes Act (CISA)26In the case of bonds, debentures and money market instruments, including firm underwriting by a bank or investment company and allotment in a subsequent issue, they are exempt from turnover tax. In practice, this is known as the "primary market exemption".

6. acquisition and income tax

The Liechtenstein Tax Act (SteG)27 or the Liechtenstein Tax Ordinance (SteV)28 do not contain any specific provisions with regard to block chain companies or the TVTG. Therefore, the VT services presented here are to be subsumed under the general provisions.

6.1 Income tax

With regard to the tax treatment of crypto-currencies, this means that every natural person with unlimited tax liability must declare the stock of crypto-currencies at the beginning of the respective tax year and convert it into Swiss francs.

At the same time, speculative profits from trading in crypto-currencies are tax-free and do not have to be declared. This is not only very attractive in terms of the tax burden, but also represents a considerable administrative relief compared to Germany and Austria.

6.2 Income tax

The operating activity as VT service provider does not fall under the tax exemptions of Art. 48 SteG, but is rather subject to the regular income tax of 12.5%. The effective tax rate may be lower as a result of the deduction of interest on equity, since this reduces the basis of assessment for income tax. This is because if the object of the company also provides for the holding of crypto-currencies and the investment in crypto-currencies falls under the assets required for operations, then the investment in crypto-currencies is also subject to the equity capital interest deduction and thus leads to a reduction in the effective tax burden.

7. conclusion

The analysis of the Liechtenstein Blockchain Act from a tax perspective confirms the special role of tax law in relation to other areas of law. Tax law is characterised by the economic approach or the principle of "substance over form". Precisely for this reason, the TVTG does not provide for any adjustments to the tax law. Every tax law expert always assesses a situation independently of the external form. Thus, it makes no difference whether, for example, the issue of a bond or an STO in which a bond has been tokenised has to be analysed from a tax point of view. Regardless of the technology used, the facts of the case must therefore be analysed completely and abstracted to its economic core.