UK & German divided ahead of bitcoin EU VAT case

Wed 11th Jun 2014

The European Court of Justice (ECJ) is now reviewing EU member states’ views on the tax treatment of digital currencies, such as bitcoin, ahead of a formal ruling. A sharp division has emerged in this process between the UK and Germany on the liability of bitcoin to VAT, which may put EU-based traders at a distinct disadvantage globally.

Bitcoin – commodity or currency driving VAT liability

The ECJ is currently reviewing a bitcoin VAT referral from the Swedish tax authorities which is seeking clarity on the liability to VAT of bitcoin exchanges. The Swedish authorities believe that trading services should be subject to Swedish VAT at 25%. Its consider bitcoins as a commodity, similar to gold, and therefore not exempt under Article 35 of the EU VAT Directive. Sweden has been joined in this view by Germany.  Estonia views bitcoins as fully liable to VAT.

The UK Treasury is taking the view that digital currencies are ‘private money’, and therefore a financial service. This would mean services provided by bitcoin traders would be VAT exempt. The UK classified digital currencies as VAT exempt in March 2015.  The European Commission agrees with this view.

At stake is potentially Europe’s role as a global hub for digital currencies. The UK wants to position itself as the world’s trading hub, which includes the most competitive tax environment for traders. But an unfavorable ECJ tax ruling would hand a big advantage to competing locations such as Singapore which classifies bitcoin as GST exempt or Hong Kong which has no VAT regime.