Currently Maltese companies carrying out activities involving distributed ledger technology (DLT) are obligated to pay the same types of taxes as any other business. They can also avail of tax allowances and incentives as well as benefit from Malta’s substantial network of the double tax elimination agreements.
Maltese crypto companies might be subject to paying the following taxes:
- Corporate Income Tax (CIT) – 35%
- Value Added Tax (VAT) – 18%
- Stamp Duty (SD ) – 2-5%
- Social Security Contributions (SSC) – vary depending on an employee’s age, salary and other conditions
The taxes are administered by the Commissioner for Revenue (CFR) who issued guidelines determining the application of the Income Tax, Stamp Duty and VAT to the activities involving DLT assets. The foundational rule is that VAT, Stamp Duty, and Income Tax handling of any DLT asset depends on the purpose for which the asset is used, not the category of the asset.
Nevertheless, for the taxation purposes DLT assets are divided into the following categories:
- Coins – cryptocurrencies, functionally constituting the cryptographic equivalent of fiat money (created to be used as a means of payment or medium of exchange, or function as a store of value)
- Financial tokens – analogous to equities, debentures, units in collective investment schemes or derivatives
- Utility tokens – utility, value or application is restricted to the acquisition of goods or services either solely within the DLT platform on, or in relation to which they are issued or within a limited network of DLT platforms
The financial year typically coincides with the calendar year but under certain circumstances companies can also choose to change the dates by submitting a written request to the CFR.
In order to ensure proper calculation of taxable income and allowable deductions, all Maltese companies must keep meticulous records of income and expenditure as determined in the Article 19 of the Income Tax Management Act.
Corporate Income Tax
Companies incorporated in Malta are subjected to paying the Corporate Income Tax on their worldwide income. Activities involving DLT assets are regulated by the current provisions of the Income Tax Acts and are analysed by referencing the nature of the activities, the status of the parties and specific facts and circumstances of a particular case.
Principles of the Income Tax treatment:
- Tax-relevant value in transactions involving DLT assets is determined by referencing the market value of the DLT asset in question; the market value may be determined either by the relevant Maltese authority or by referencing the average quoted price on reputable exchanges
- Proper and sufficient records of transactions involving DLT assets must be consistently kept; values expressed in a cryptocurrency are converted to the reporting currency in which the taxpayer submits its financial statements
- Payments made or received in a cryptocurrency are treated like a payment in any other currency for the Income Tax purposes (e.g. for businesses paying salaries or accepting payments for products or services in cryptocurrency general tax principles still apply)
Examples of the application of the general tax principles to transactions involving DLT assets:
- The profits derived from the activities of exchanging coins are treated like the profits derived from the business of exchanging fiat currency and proceeds from the sale of coins held as trading stock in a business are regular income
- The return derived by the owner of financial tokens on his holdings, such as payments equivalent to dividends, interest, premiums etc., in a cryptocurrency or in another currency is treated as income
- The taxability of financial or utility tokens transfers depends on whether the transfer is a trading transaction or a transfer of a capital asset
- If the transfer is a trading transaction, the payment is treated as a receipt on revenue account
- Regular income tax rules apply and, accordingly, profits from the sale of tokens which would have been acquired with the intention of resale at a profit, or from a profit-making activity, are to be treated as trading profits
- If the transfer of financial tokens isn’t a trading transaction, it should be determined if they can be treated as securities which are regulated by the provisions on the tax on capital gains under article 5 of the Income Tax Act
- Capital raised for an initial offering isn’t treated as income of the issuer and the issuance of new tokens isn’t treated as a transfer for the purposes of taxation of capital gains
- Gains or profits sourced from the provision of the services or products to the token holders are treated as income
When calculating taxable amounts, it’s worth remembering that the Maltese taxation framework allows every company engaging in activities involving DLT assets to benefit from over 70 international agreements on the elimination of double taxation which guarantees that income generated from crypto activities isn’t taxed twice.
Value Added Tax
The VAT guidelines are currently provided for coins, financial and utility tokes and initial offerings. Activities involving DLT assets are analysed by referencing their nature, the status of the parties and the specific facts and circumstances of the particular case.
The following legislations is applicable to the businesses engaged in DLT-related activities:
- The VAT Act (Chapter 406, Laws of Malta)
- The EU VAT Directive (2006/112/EC)
- Regulations and case-laws of the Court of Justice of the European Union (CJEU), applicable to the specific transactions
If the place of supply of products or services isn’t in Malta, the rules of the other relevant jurisdiction would apply. In case of electronically supplied services to the EU-based clients, the business may choose to register and account for VAT of the other EU country under the VAT Mini One Stop Shop (MOSS) scheme.
- If an instrument serves as a means of payment accepted by certain operators, it’s treated as fiat money for the purposes of VAT application which means the exchange of cryptocurrencies for other cryptocurrencies or for fiat money is VAT-exempt
- Services of digital wallet providers are VAT-exempt when they are explicitly related to allowing the users to hold and use cryptocurrencies
- Crypto mining itself is outside of the scope of VAT if there is no recipient of the service, but if crypto mining service providers receive payment for such activities as transaction verification, a standard VAT rate applies
- Crypto exchange platforms are subject to VAT when they charge users for their services (e.g. by applying a transaction fee or commission)
The following VAT guidelines apply to tokens:
- If financial tokens are issued purely for the purpose of raising capital, they are VAT-exempt as it’s not constituted as provision of products or services
- If a utility token is characterised as a voucher (issued for the exchange for specific products or services provided by a known supplier), it’s generally subject to VAT
Initial offerings should be treated as follows:
- If investors transfer their money to fund the project and no specific products or services are provided at this stages, VAT isn’t applied
- If the tokens issued give rights to identifiable products or services, such activities are subject to VAT
If transfers involve DLT assets that have the same characteristics as marketable securities defined in the Duty on Documents and Transfers Act (DDTA), they are normally subject to the Stamp Duty. However, every transaction has to be analysed individually by looking at the nature and circumstances of activities and the profile of the involved parties.
The team of Regulated United Europe (RUE) is pleased to offer tailored taxation advice to everyone who’s interested in running a crypto company in Malta and, for that matter, in standing out in the market. We can also guide you through the company formation and crypto licensing processes as well as provide financial accounting services. Please click [here] to book a consultation.