18 Feb NEW TAX CIRCULAR ON CRYPTOCURRENCIES IN LUXEMBOURG
WHAT IS THE NEW LUXEMBOURG CIRCULAR ON THE TAX TREATMENT OF CRYPTOCURRENCY IN LUXEMBOURG?
The new circular on the tax treatment of cryptocurreny in Luxembourg of 26 July 2018: What are the contents of the new circular on cryptocurrency?
The Luxembourg tax authorities have recently published their own circular on the tax treatment of cryptocurrency. Circular L.I.R. n 14/5 – 99/3 – 99bis/3 of 26 July 2018 provides guidance on the tax treatment of cryptocurrency income for individuals.
Cryptocurrency is considered an “intangible asset” in Luxembourg
The Luxembourg tax authorities point out that cryptocurrencies such as Bitcoin do not represent legal currency, they are considered “intangible assets”. Consequently, the current taxation regime for intangible assets will apply to cryptocurrency income.
The Circular also clearly expresses that taxpayers are not permitted to prepare or state their accounts for tax purposes or their taxable income in cryptocurrency. In this sense, income, expenses and costs formulated in cryptocurrency must be determined either in euros or in another legal tender currency.
Furthermore, the use of cryptocurrency for payments does not affect the tax nature of the income. For example, the rent of a flat paid in bitcoin does not affect the classification of the rent as rental income in this case. The statutory tax provisions apply according to the nature of the income.
The Grand Duchy of Luxembourg classifies the tax treatment of cryptocurrency as either commercial or non-commercial activities.
Tax treatment as a commercial activity in Luxembourg
The tax treatment of income from business activities is specified in Article 14 of the Luxembourg Income Tax Law (LEStG). The circular states that the generating of income from cryptocurrencies such as so-called “mining”, the online operation of crypto-asset exchanges or the sale of cryptocurrencies is to be assigned (for income tax purposes) to income from business operations in accordance with Article 14 of the Income Tax Act if it should be a commercial activity.
The following criteria can be used as indications for the existence of a commercial activity:
- Existing premises or an organisation intended for the operative performance of virtual cryptocurrencies;
- financing through debt capital;
- Frequent rotation of the stock of virtual cryptocurrencies;
- Trading on behalf of third parties
Expenses resulting from this commercial activity, such as electricity costs used for mining and/or conversion fees of crypto-asset exchanges, are only deductible as business expenses if they are exclusively caused by the company pursuant to Article 45 LEStG. In addition, the Circular states that income arising from the activities of taxpayers subject to corporate income tax pursuant to Article 159 in conjunction with Article 162 LEStG is always deductible as business expenses. Article 162 LEStG, must always be considered as a commercial activity.
Tax treatment of other income in Luxembourg
The taxable income category of other income is described in Article 99 in conjunction with Article 99bis LEStG. Article 99bis LEStG. This tax regulation only applies if no commercial activity according to Article 14 LEStG is carried out. This means that any profit or loss resulting from cryptocurrency trading is considered a speculative profit or loss if the holding period of the cryptocurrency does not exceed six months. In the case of the conversion of a cryptocurrency such as Bitcoin into another cryptocurrency or a legal tender currency such as Euro or USD, this transaction is deemed to be an exchange of assets under Article 102 (1a) LEStG. The taxpayer is then considered to have sold the virtual cryptocurrency for consideration, followed by an acquisition of a good or service received for consideration.
Treatment of cryptocurrencies for wealth tax purposes
For Luxembourg wealth tax purposes, which only applies to fully taxable Luxembourg resident companies and is levied at a rate of 0.5% per annum, cryptocurrencies must be valued in accordance with the provisions of the Valuation Law, i.e. at market value.
Conclusion on the new circular on the tax treatment of cryptocurrency in Luxembourg of 26 July 2018
The Grand Duchy of Luxembourg has decided to apply the current tax rules to cryptocurrencies instead of finding new and up-to-date tax rules. The approach to the tax treatment of cryptocurrencies in Luxembourg is strongly reminiscent of the German federal government’s income tax approach to mining and exchanging cryptocurrencies. See the statement of the German Federal Government of 29 December 2017 (Bundestag-Drucksache 19/370 of 05.01,2018, page 21 f.). Unfortunately, the Grand Duchy of Luxembourg has thus sent a message that cryptocurrencies and related businesses with cryptocurrencies are welcome, but the Grand Duchy of Luxembourg will not become the European crypto paradise. Other countries such as Switzerland, Austria or Malta are already much more advanced in this respect with planned regulations or tax rules on cryptocurrencies.
Please find here the circular on the tax treatment of cryptocurrencies in Luxembourg in French.
Further considerations on the circular of 26 July 2018 and the classification as a financial instrument in Luxembourg
One of the open and unfortunately also unresolved questions arising from this circular of 26 July 2018 is whether the classification of a cryptocurrency as an intangible asset is entitled to be extended to e.g. the Luxembourg law of 11 May 2007 on the Luxembourg Société de gestion de Patrimoine Familial(“SPF”). According to this law, an SPF can only own financial instruments (meant in the broadest sense), while at the same time it may not engage in any active operational business activities (private asset management). Would an SPF be allowed to own cryptocurrencies in the context of private asset management? Unfortunately, the answer remains unclear.
In Luxembourg, the SPF is not supervised by the direct tax administration but by the Luxembourg indirect tax authority (Administration de l’Enregistrement et des Domaines). Thus, the present circular of 26 July 2018 (issued by the direct tax authorities) would not necessarily have to prevent SPF from holding cryptocurrencies as private asset management under the law of 11 May 2007.
Nevertheless, whether or not cryptocurrencies should be considered as financial instruments is currently under consideration by most financial authorities around the world, and the answer is still unclear in most cases. Certain foreign financial authorities have issued guidelines or tests to determine on a case-by-case basis whether or not a cryptocurrency should be treated as a financial instrument, and we also believe that cryptocurrencies may develop other attributes over time (e.g. stability, government support) and fit more into the definition of financial instruments.
This situation is expected to evolve in the near future as cryptocurrencies, ICO and blockchain gain legitimacy and shift towards the traditional financial system.
Finally, it should be noted that the Luxembourg indirect tax authorities issued Circular No. 787 on 11 June 2018 based on a recent ECJ case law confirming that cryptocurrencies, like traditional currencies, should benefit from the exemption provided for in the VAT Directive No. 2006/112/CE, provided that these cryptocurrencies are a direct means of payment and are accepted as such by certain market participants. See our following post VAT exemption for cryptocurrency in Luxembourg on this topic. Although not all cryptocurrencies are designed as a means of payment, it seems clear that some meet this condition such as Bitcoin, Litecoin, Nano etc…. and should therefore be a suitable asset for a Luxembourg SPF.
Your tax advisor in Luxembourg for cryptocurrency
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