Crowdfunding - financing or more?
Workshop on the occasion of the ISIS) seminar of 24 September 2020 entitled "Value Added Tax. Current. Compact. Interdisciplinary."
Case 1 Financing of a film
The filmmakers Daniela Hauser and Franziska Blum (resident in CH) would like to finance their next film project entirely through the crowdfunding platform wecanmakeitpossible.com. The sponsors can choose from the following options:
The funding is a great success. By the end of June 2020, they receive binding commitments from "patrons" and "sponsors" amounting to CHF 145,000. By the end of July 2020, they already have CHF 125,000 in their bank account. From August 2020, they will begin with the production of the film.
- The filmmakers come to you and would like to know what the VAT consequences of collecting the money could be. What are your considerations and recommendations?
- Does anything change in the tax assessment if the filmmakers found an association which is recognised by the tax authorities as being of public benefit and this association produces the film (otherwise the same facts)?
Case 2 Black Cheetahs
The American football club Black Cheetahs has launched a crowdfunding project on the localheros.ch platform. Localheros.ch operates a free donation portal where local clubs, cooperatives, foundations or even private individuals (e.g. athletes, artists) can collect money for the implementation of a project of public benefit in Switzerland.
The club Black Cheetahs urgently needs new equipment for the first and second team (costs of CHF 25'000), in which young people between 10 and 18 years train. In addition, the clubhouse is to be renovated (CHF 75,000) and the fees for the two coaches and costs for away tournaments (CHF 40,000) are to be secured for the next two years. Therefore, CHF 140,000 are to be collected via crowdfunding.
Private donors who donate CHF 100 or more receive merchandise (caps, the association's mascot) as a thank you, while commercial donors who donate CHF 5,000 or more receive an advertising page in the association's annual magazine as a thank you. Further income is generated by the sale of food and drinks at the annual summer festival (approx. CHF 25'000 per year) and by the statutory membership fees of CHF 30'000 per year. The association is exempt from taxes on profits as a non-profit association according to Art. 56 Bst. g DBG and has not yet been entered in the VAT register.
The operator of the localheros.ch Platform, the Swiss financial institution Bank Sparbatzen, receives no remuneration; it merely secures in the GTC the unrestricted right to use project information (text, images, videos) for any publication for sales and marketing purposes.
The operator can ensure so-called cofunding for each contribution from supporters, i.e. it increases each contribution by a further grant from its internal cofunding programme. Whether the project in question will also receive a cofunding contribution is at the operator's discretion. There is no entitlement to this cofunding.
The crowdfunding campaign is successful and Black Cheetahs generate the following funds via localheros.ch in 2020:
The association owes the resounding success of the crowdfunding project to the following note in its association booklet 12/2020: "Thanks to Bank Sparbatzen, your partner in all financial matters, we were able to realise our dream: Our teams are more successful than ever in their new outfits and the renovated clubhouse shines in new splendor."
- What are the VAT consequences for Black Cheetahs American Football Club in terms of
- the VAT assessment of the individual cash inflows from private individuals, companies and from co-funding and
- a possible VAT obligation?
- Would a (voluntary) VAT registration as of 1 January 2020 give the association advantages
Case 3 Financing with profit sharing
SW-Solution GmbH is a company based in Berne, Switzerland, which specializes in the development of individual software in the corporate sector. In the future, it would also like to develop standard software for various industries for the automation of business processes and distribute it worldwide.
For the first product, a software for enterprise event management, SW-Solution GmbH needs CHF 250'000 for development and distribution of the software. It is looking for investors/donors on the crowdfunding platform www.swisslend.ch.
The conditions are as follows:
- Offer period 30 days;
- each investor can participate in the project with a minimum amount of CHF 1000 (bid);
- The capital is repaid within three years. In this case, the maximum annual interest rate is 4.5% p.a. (fixed interest);
- Long-term investors (term of at least 10 years) are also offered the prospect of a performance-related interest rate of a maximum of 3.2% p.a. (performance-related interest
- the interest rate is set in an auction; i.e. investors indicate how much money they want to make available at what interest rate. The contract is awarded to the investors who offer the lowest interest rate.
According to the General Terms and Conditions, swisslend is a pure "brokerage platform for corporate loans". swisslend itself does not grant loans.
Before borrowers and investors/lenders can use the platform, they must register and disclose their identity to swisslend. They are first checked by swisslend with regard to the requirements of the AMLA (Federal Act on the Prevention of Money Laundering and Terrorist Financing of 10 October 1997, SR 995.0). swisslend also checks the creditworthiness of borrowers based on the documents submitted (credit application with description of the project/activity, detailed information on the company, financial requirements, conditions, etc.). Based on this creditworthiness analysis, a minimum interest rate is proposed. The borrower must undertake to use at least this interest rate at the auction.
Swisslend accepts no responsibility for the accuracy or plausibility of the documents/projects or for the creditworthiness of the borrowers. For each project or borrower, the platform does publish a rating (A to C) on the website based on the creditworthiness analysis. However, according to the General Terms and Conditions, the rating is purely "indicative", i.e. it does not constitute a binding statement on the borrower's solvency. Swisslend declines all liability.
After the creditworthiness analysis, the borrower can independently place the credit application on the platform. However, the borrower must offer at least the interest rate determined by the creditworthiness analysis. Investors can now submit their bids (amount and interest rate) within the auction period. The loan agreement is concluded after the end of the auction, provided that the bid is taken into account and that sufficient bids are also submitted at the maximum interest rate specified by the borrower.
Once the loan agreement has been concluded, the investors/lenders pay the loan amount into a swisslend account. Swisslend transfers the loan amount to the borrower, less the brokerage and service fee owed by the borrower.
The platform also takes care of dunning and collection for the investors (interest and repayment of capital). They pay a fee for this.
What are the tax consequences for SW-Solution GmbH, the financial backers and the platform from the financing?
Case 4 Immo-crowdfunding
Real Estate Crowdfunding AG (REC AG) offers crowdfunding solutions for real estate. It acts as a platform for investors and property owners (sellers) and also takes on administrative tasks in the management of properties after successful investment.
Potential investors are currently being offered a commercial property at Musterstrasse 10 in Zurich on the rec.ch platform, which is fully let on an optional basis.
Crowd Funding Campaign
On 1 March 2020, REC AG concludes a publicly notarized purchase agreement with the previous owner for the property at "Musterstrasse 10, Zurich" for a purchase price of CHF 15,000,000, thereby "reserving" the potential investment property (investment property).
The purchase agreement contains a substitution clause limited until 30 September 2020. This provides for investors who applied for co-ownership during the crowdfunding campaign to enter into the purchase agreement.
During this period, private investors and institutional investors, such as investment foundations or pension funds, apply to REC AG to acquire part of the purchase object in co-ownership. The rights and obligations arising from the publicly notarized purchase agreement can only be assigned in full to the investor group (crowd or co-owners' association).
If there is no transfer of ownership to one or more third parties within the period, the purchase contract shall lapse.
The campaign is successful. As early as 7 August 2020, 25 investors will be entered in the land register as new co-owners. The investment amounts range between CHF 100,000 and CHF 1 million. 50% of the purchase price will be debt-financed.
A "management contract" is concluded between the investors and REC AG, by which the investors commission REC AG to "arrange and execute the purchase" of the specific investment property. As soon as the purchase price is received in an escrow account, REC AG is obliged to let the investors enter into the purchase agreement. Upon transfer of ownership to the investors on 7 August 2020, REC AG is entitled to a brokerage fee of 3% of the notarized purchase price.
In addition to the purchase price and the broker's fee, the investor owes incidental purchase costs (notary's fees, lawyer's fees, etc.), which are paid by REC AG for the co-owners.
Income and expenses during the investment phase
The leases existing at the time of acquisition will be transferred to the joint owners' association (MEG), which comprises the 25 investors. In future, MEG will also act as a contracting party when new rental agreements are concluded. MEG is represented by REC AG, which is responsible for property management.
MEG's usage and administration regulations state that REC AG will take over the management and administration of the property - for a minimum term of three years with an option to extend. The competence sum for repairs and maintenance work is 1% of the purchase price of the property, but at least CHF 50,000 per year. Within this budget framework, REC AG can independently and without the consent of the co-owners distribute orders, provided these are deemed necessary and reasonable.
Any expenditure in excess thereof requires the approval of the meeting of the co-owners. In emergencies, the amount may be exceeded if, for example, urgent repairs are necessary to maintain the value of the property.
REC AG is remunerated for this service with an annual fee of 5 % of net rental income per year.
After approval of the annual financial statements by the co-owners' association, the investors are credited with the returns (income according to property accounting) in accordance with their co-ownership share. During the year, at-acto payments are made.
If the co-owners decide to sell the property as a whole, REC AG is exclusively commissioned with the search for potential buyers. If a sale is concluded, REC AG is entitled to a "processing commission" of 1% of the notarized purchase price (excl. VAT). REC AG is entitled to this claim regardless of whether it actually brokered the buyer.
In addition, the co-owners can sell their share at any time, with the remaining co-owners having a right of first refusal.
- What VAT consequences can result from this investment
- In the campaign phase,
- during the investment phase
- as well as for the divestment/exit?
- Assess the VAT consequences for the seller, the investors and REC AG.
Case 5 Planting trees
The non-profit "Foundation for Sustainability" wants to contribute to the fight against climate change and plant 5,000 trees in Switzerland every year for this purpose. To do this, it is collecting money on a crowdfunding platform. The backers can choose from various options. With none of the options will the capital/money be paid back:
What are the tax consequences for all options (turnover and input taxes) for the foundation?