Several of our entrepreneurial clients are making significant investments in cryptocurrencies (such as bitcoin). Others are looking to participate in the launch of new cryptocurrencies, through Initial Coin Offerings. International clients in particular are looking at the opportunity to set up companies to develop the blockchain technology which backs up cryptocurrencies into new business areas, in those offshore jurisdictions such as Gibraltar which already have a regulatory framework.
This is an area where innovation is so fast that tax authorities are struggling to keep up, which means that it is very difficult to establish the correct tax treatment of profits or gains in this area. HMRC have issued two sets of guidance, but these are worded very generally and refer to the particular facts and circumstances of the taxpayer. They are clearly concerned not to set precedents which tie them to a particular treatment of something which hasn’t yet been invented. Regulators in many countries are struggling to categorise coins and tokens, and the characterisations used for regulatory purposes haven’t been adopted for tax (for example, HMRC say that gains on bitcoins should be computed under the pooling rules for securities).
We advise our clients on the basis of applying the evolving guidance and an understanding of the concepts in the legislation to their particular facts.
Many groups which are developing Distributed Ledger Technology are looking to set up companies in locations which have a DLT regulatory framework. Where the company is set up in a low-tax jurisdiction, transfer pricing is a key issue. Setting up a Gibraltar company to own the software, but using UK staff in the UK to do all of the development work on a cost plus basis will not result in all of the profits being treated as arising outside of the UK for tax purposes. Software falls within the tax intangibles asset regime, and it may also be necessary to consider the Controlled Foreign Company rules and Diverted Profits Tax, as well as looking at whether the UK company qualifies for any reliefs.
The taxation of DLT companies is also likely to be a changing area, as governments get to grips with taxing the digital economy, which may involve moving to revenue taxes (such as the proposed EU 3% tax and may introduce the value created by user participation into the transfer pricing considerations.
If you would like to discuss these tax issues in your circumstances, please click here or contact us to talk to a member of our team.