Matthias Langer, partner and tax consultant at Actus AG in Liechtenstein, talked in an interview about his daily work with companies who want to come to Liechtenstein with their ICOs and which taxes on tokens have to be paid in order to not commit tax evasion.
(You can find the original interview in German HERE)
Blockchain and taxes
Ramona: Hello Matthias, I’m happy you’re here and that you are giving us the first interview on ICO.li.
Matthias: Thank you very much for the invitation. And I am also happy that I can bring tax law a little closer to the general public.
Ramona: Matthias, you are one of the crypto experts here in Liechtenstein, and a tax consultant as well. How did you get into the blockchain scene?
Matthias: I have to say that it was by chance, through Thomas Nägele. Thomas Nägele is actually the pioneer here in Liechtenstein and his topics are blockchain and crypto-based companies. For his first workshop he was looking for a tax consultant and said, Matthias, would you be open to this topic and would you take part in this workshop and tell my clients what the tax support for currencies actually looks like? And then I was allowed to take part in this workshop, apparently I didn’t do so badly either. The clients were satisfied and I was invited again and again to further.
Ramona: Great, and how long have you been there?
Matthias: We have the honour that we were actually allowed to be there from the very beginning and to look after the first blockchain company in Liechtenstein, both from an accounting and a tax point of view.
How do I get tax assistance as an ICO?
Ramona: And do many ICOs come to you?
Matthias: Yes, many. The special thing about it is that the crypto scene is a really close community, which means that although we are a very young law firm, we live very much from recommendation marketing and even tend to have the problem that we have to reject projects.
Ramona: Then there are certainly also criteria that one has to fulfil to be able to be supervised by you?
Matthias: One criterion, for example, is which law firm is involved. Is it a serious partner, what is their onboarding process, etc. But the most important thing for us is actually the team of the company. We have seen that with a team the success of the project stands or falls. And over time you get an impression of how these people act and get involved. You can see whether it is a serious project or a project where you just try to earn money quickly.
Ramona: Tax advice is also needed for the legal opinion?
Matthias: Yes, exactly, that’s one aspect and then at the latest when the company is founded. Because in the beginning there always needs to be a legal structure for the clients, which also serves as a basis for the FMA. Tax law is a very important aspect here. Because, of course, on the one hand we have to keep an eye on the tax law nature itself, but on the other hand we also have to create an overall picture for the investors and employees.
Taxation of tokens
Ramona: Which tokens are taxed?
Matthias: In the past, a distinction was made between payment tokens, utility tokens, security tokens and equity tokens. The Liechtenstein Tax Administration is very much looking at what Switzerland is doing, which means that we still have this distinction between payment tokens, utility tokens, security tokens and equity tokens. And when it comes to taxation, we have to consider what kind of taxation do we mean?
We once have the corporate level. It’s about income tax and VAT. On the other hand, we have the level of natural persons. The question is, how do I classify the tokens? And that may well be classified differently, as the FMA would do, for example. And the special thing about tax law is that it is also inconsistent in tax law itself. For income tax I can perhaps have the 1st view, and for value added tax perhaps the 2nd view.
In Germany it is also the case that it doesn’t matter whether I have Euro or Bitcoin, I have a tax realization. In practice, however, this is neither taken up by the tax offices nor by the banks. Most German banks are not even able to record foreign currency transactions, because they simply say that it is not technically possible. This means that the law says that I have a tax liability, but I cannot document the whole thing and it is more or less tolerated.
Ramona: So that means it’s not really user-friendly?
Matthias: Yes, and I always have a risk if I am blackened somewhere, and the tax office wants something bad for me, then I can find something for everyone.
Ramona: And you mentioned in a conversation that you can track all the transactions with one app?
Matthias: Exactly, an app that we know and recommend to our customers, is the Cointracking app. And I can use it to import all the transactions into the app, so to speak. And the goal is for the app to show me all the speculative gains. Because normally with private individuals, the Fifo method should be used, “First in, first out”, in order to document the whole thing accordingly. And that goes naturally, if I have customers who trade very strongly and speculate, sometime no longer by hand. This has to be IT-supported.
Ramona: And when it comes to taxation, do you always have to work with the current exchange rate of FIAT and crypto currencies?
Matthias: Exactly, in the past there was one big problem, which exchange rate do I take and from which platform? As an example, the crypto-friendly Swiss people, who publish courses on this subject, lead the way here. Just as they normally publish foreign currency rates such as Swiss francs or Australian dollars, they have also provided daily rates for the main crypto currencies, which can then be used for tax declarations. This is very helpful for us who also do bookkeeping.
Ramona: So this will probably be a kind of mean value between the different crypto exchanges?
Matthias: Yes, although unfortunately only the few big ones are in it. This means that if I invest in smaller crypto currencies, i.e. utility tokens, I still have the same problem.
Ramona: What about taxation in arbitrage trading? Because it’s machines that take over all the transactions?
Matthias: And this is exactly where it is all the more important to have a flexible accounting system in order to be able to act more flexibly as a company. Because tax law stipulates that every transaction must be declared according to the law. That means buying and selling. And if I now have purchases and sales every second, and had to book them manually, extreme administrative costs would arise. And here it is important to work with interfaces. That everything can be read directly from the blockchain and the wallets and transferred to the corresponding accounting program. Also with the transactions from the banks. Modern banks already offer that I can directly access the interface of the banks, read them out directly and then automatically enter them into my accounting system.
Ramona: But that would no longer be natural persons.
Matthias: Exactly, that’s often a legal entity. Because with natural persons, as we have heard, I am not interested in speculative profits. In the case of legal entities, however, every transaction is a tax transaction, which means that I may have a profit or a loss that I have to document. And that’s why every transaction has to be documented.
And in practice this is also very challenging for ICOs. Because especially when many small amounts are invested, I have to enter each one in the accounts. And in practice, it also depends on which auditing company I have. There are auditing companies that accept it if I simply enter a balance calculation at the end of the day at the average exchange rate of the day. And other auditing companies really want to have every specific trade converted in real time at the exchange rate.
Some projects deliberately work with algorithms and look at the different financial centres to get arbitrage profits there. And that’s why these fluctuations are going down at the moment, because these spreads aren’t so big anymore. These are examples of working with arbitrage profits. There are already individual funds that already offer this specifically and say: You as an investor profit from the fact that we generate arbitrage profits.
Ramona: It all sounds pretty complicated.
Matthias: Yes, thank God, then I have more work!
Amended tax law
Ramona: The Liechtenstein tax law has now been amended, what else can we learn from it?
Matthias: On the one hand, we can learn that Liechtenstein has a very compact tax law with almost 160 paragraphs (50 pages). As a comparison, Germany has almost 3000 pages of tax laws, plus 3000 guidelines and judgements. Liechtenstein actually always tries to capture the essence in order to leave room for manoeuvre and to react flexibly to circumstances. For example, the EU has set Liechtenstein the task of introducing certain abuse norms within a year in order to get off the grey list. And Liechtenstein has implemented this within 6 months. Especially for investors, it shows that Liechtenstein adapts to international conditions and tries to implement everything very quickly in order to have legal certainty.
Ramona: That will certainly also be a reason why the ICOs come to Liechtenstein?
Matthias: Very right. But to be fair, it is not so much the tax location of Liechtenstein, as the openness of the authorities. I myself am also a German tax consultant. And of course the German tax advisors think it’s great that I only have a third of the tax burden in Liechtenstein, but in fact they come more for the pragmatic approach of financial market supervision. The fewest clients come to Liechtenstein because of the tax, because it is lower, but because of the regulatory environment, because there are already other crypto companies here and because there is a corresponding community here.
Risks in the event of nontaxation
Ramona: What do you have to pay attention to when it comes to the laws, in order not to slip into the danger of tax evasion through too little knowledge?
Matthias: Here again we have to distinguish between two levels. Once for the companies, once for the private individuals.
As far as companies are concerned, I see that many underestimate VAT. In terms of income tax, many customers think that they will have to pay tax on it anyway and declare it. But what we see and what is not considered at all is VAT.
For natural persons, the biggest challenge is still the declaration. We do have customers who want to declare this properly, but there is no bank certificate at the moment. If I have a normal bank account, I can see what my wealth is and what speculative profits I have. But the classic customer doesn’t invest in Bitcoin, keeps it for two years and then sells it again. But many customers invest in Bitcoin, then exchange it for ether, then exchange it for Ripple. And every single transaction is a taxable process, which I have to keep evident and document. And also, the tax authorities are still overwhelmed by it. There is actually hardly any documentation in addition. And often one hears then from the tax offices, that an Excel-overview should be sent and transmitted. Recently a customer came to me who said that I would like to declare it, but I can only trace 70% of the transactions myself – how do we proceed now?
Ramona: Have you found a solution?
Matthias: On the one hand you try to work with estimates, and on the other hand it depends very much on which country you are in. Because in Germany it is added that on the one hand there are speculative gains on this capital gain, i.e. income tax, but in addition Germany says, especially with the utility tokens, that this is subject to turnover tax. And that’s exactly the biggest problem I have from a tax criminal law point of view. Because I can trade for a year, push back and forth, and maybe I have no income at the end of the day, but every sale can suddenly trigger sales tax and then I can accumulate very high sales tax debts. And in Germany it is the case that even with a tax reduction of 50,000 euros, it results in a so-called serious case and is punished with up to 10 years in prison.
Ramona: Then you really should pay attention to paying tax on it.
Ramona: It is said that ignorance does not protect against punishment. But many don’t know or don’t want to know?
Matthias: Or often it’s the argument that the tax office doesn’t even notice. How is the tax office supposed to find out about this transaction? It may well be that it is not possible today. But we have to think about which technologies might come first. Because 10 years ago, in 2008, there was no exchange of information at all. In the last 10 years we have changed from information exchange from search to automatic information exchange with banks. And who knows how in 9 ½ years the whole information stand will be, in terms of crypto and blockchain for the tax offices. And the tax office has over 10 years time to take up the facts and then determine that you made a mistake there. That is, even if I’m safe today, it doesn’t mean I still will be in 10 years.
Ramona: This means that all those who have not yet paid taxes still have to reckon with a penalty?
Matthias: Exactly. And the nice thing about the blockchain technology is that it is documented, it is unchangeable and at some point, it can also be understood.
Residence of employees
Ramona: If all employees are based in Germany, then it’s a clear thing. But if some employees are abroad now, what about taxation?
Matthias: The fact that everyone is based in Germany is a case we haven’t even had yet. Because it is the usual procedure, investors, employees or someone is always abroad. There you have to distinguish whether the employee is a permanent employee or a freelancer. With the employees who are actually hired, I have the situation where I have to look where the employee sits. And since the employee often works from home, I have not only the tax issue, but also a social security issue, and often also German income tax. Then I have to make sure that I don’t have double taxation and that the whole thing is declared correctly.
We can see that the local tax consultant is completely overwhelmed by this. For employees who say that they simply issue an invoice, the issue is again to carry out the correct declaration, and for the Liechtenstein company I have the subscription tax. The subscription tax is that it VAT needs to be payed on these services to Liechtenstein companies. This is also something that is often overlooked. And when I suddenly find out after a year that “Oh, all my bills are going to be 7.7% more expensive this year”, that can of course tear holes in the business plans.
Ramona: Yes, especially with all the start-ups who were supposed to collect the money.
Matthias: Exactly. And again, as an administrator who didn’t register for this tax, I have this criminal component again. Because I have to know that there is a subscription tax.
Ramona: Yes, as you said, it affects quite a lot of people, because you can quickly have your headquarters in Liechtenstein, only physically getting people in is difficult.
Matthias: Very difficult. On the one hand, because of course many don’t want to leave. It’s hard to settle Berliners in Liechtenstein in the quiet area. But also of course because of the restrictive residence permit.
Ramona: Thank you very much, Matthias, for the great interview! That was it from us now. I hope you enjoyed it and we’ll see you next time!
For a better readability some passages were shortened. But the meaning of the passage has been maintained.