Bitcoin, a digital equivalent of real money, was invented in 2009 by an Internet user (or a group of Internet users) using nickname Satoshi Nakamoto. No central bank issues bitcoin nor is it considered an entirely legal currency, which is supported by a publication by the European Central Bank of February 2015. Nevertheless, it can be used to pay for an increasing range of goods and services (e.g. in Poland, one can pay with bitcoins for mobile top-up in one of the major mobile telecommunications networks). The virtual currency may be also exchanged at the rate applicable at a certain time (which is very changeable) into a real currency. Therefore, it was only a matter of time, that people would ask if such transactions are or are not exempt from VAT.
Change in law interpretation
Today, Polish tax authorities consider the exchange of bitcoins into real money to be an electronic service and imposes a 23 percent VAT on it. Such a practice is suggested among other things by the construction by the Head of the Fiscal Chamber in Warsaw dated 24 June 2015 (No. IPPP2/4512-280/15-2/BH).
However, the Ministry of Finance waited for yesterday’s judgement to, as Deputy Minister for Finance, Dorota Podedworna-Tarnowska, said in response to parliamentary question (No. 32643), adjust national law. Nevertheless, first, the Ministry intends to thoroughly analyse the reasons of the CJEU’s adjudication, as the Ministry of Finance reserved in response to the question posed by the DGP daily.
Scandinavian case
The case that provided the basis for the CJEU’s judgement concerned a Swede, Daniel Hedqvist. He wanted to make profits on bitcoin exchange through Bitcoin.se website. So he made an inquiry to the Swedish tax authorities about tax-related consequences.
First, the Swedish commission of tax law issued an interpretation in favour of Mr. Hedqvist. The commission found that the exchange of the virtual currency was exempt from VAT in accordance with Article 135 item 1 letter e of the Directive on VAT (OJ of EU L of 2006, No. 347/1). That provision regulates among other things transactions related to currencies, banknotes and coins used as a legal means of payment.
The Swedish authorities claimed, however, that if bitcoin was not a legal means of payment, the Directive on VAT could not be applied to it.
When the court in Stockholm addressed a question to the CJEU in that matter, David Hedqvist hired a leading law firm and appealed to the Internet users for financial support. The amount in question was as high as 38 thousand euro (96 bitcoins as at the end of August 2014).
Other member states awaited the judgement, too. Many of them decided not to collect the tax on trading in virtual currency by the time the judgement is issued. Estonia, Germany and Poland decided otherwise.
Yesterday, the Court pointed out the increasingly common payment function of the virtual currency. Even though bitcoins do not constitute a legal means of payment, they play such a role in practice. Bitcoins can be used to pay for a wide range of goods and services, stated the Court (Case ref. c-264/14).
“Now, we are counting on a positive decision by the Ministry of Finance, which was supposed to be dependent on the CJEU’s stance”, Filip Godecki representing the bitcoin exchange, Bitcurex commented on the matter.
Marta Ignasiak, tax consultant at FKA Furtek Komosa Aleksandrowicz law firm explains that Polish taxpayers should immediately adjust their accounts to the Court’s instructions. Sellers will have the right to correct tax return provided that buyers receive corrective invoices and confirm the receipt of such documents. Furthermore, the expert hints that virtual currency sellers should adjust their accounts with regard to the tax accrued. The adjustment is necessary as the sellers have rendered services exempt from VAT and, therefore, they have no right to deduct taxes resulting from purchase invoices.
The same applies to bitcoin buyers who used the currency to render services subject to tax and made VAT tax deductions; they also must adjust their accounts and return the tax deducted.
The judgement also affects the civil law. Depending on the contents of concluded contracts, it may turn out that a seller will have to return the buyer the equivalent of the VAT amount received from him/her.