VAT Talks - Cyrill Diefenbacher



In this episode of VAT Talks we had the opportunity to discuss Swiss Taxation on NFTs with Cyrill Diefenbacher

Could you tell us more about yourself and how you ended up in the field of taxation?

I studied law at the University of St. Gallen (HSG) and finished my studies there with a master’s degree. Subsequently, I joined KPMG where I worked for six years in the Corporate Tax Team and obtained the Swiss certified tax expert degree. In 2016, I joined Bär & Karrer – one of the biggest law firms in Switzerland – as Associate and was promoted to partner in the meantime. I ended up in the field of taxation due to my internship in an audit firm after my bachelor’s degree where I detected a soft spot for accounting and numbers, besides my passion for law. Taxation covers all of these. Also, it has an international touch, which was important for my choice of profession. And lastly, it is definitely a profession with a future – which may also have played a role when I was a graduate, entering the professional world – because, as Benjamin Franklin put it, “in this world nothing can be said to be certain, except death and taxes.”.

You are a partner at Bär & Karrer, could you tell us more about your current role?

As a partner, I am the primary client contact and responsible for the product that we provide to our clients. We have many interesting and also quite international and complex mandates and I lead a team of people on each of these mandates. In this regard, I advise in the area of Corporate Tax, with a strong focus on M&A Tax (over all steps of an M&A process, including Tax Due Diligence, structuring, employee participation) and Real estate tax as well as VAT (both also especially with an M&A focus). In addition, I work on various tax projects relating to crypto, which is not only a professional passion but also a private one.

You wrote an article about “Swiss Taxation on NFTs”, why is it important to address this topic?

Because I think that NFTs have relevant use cases. They are here to stay, even though the NFT market in recent weeks unfortunately has slumped a bit, and investors may face certain challenges. NFTs can i.a. be used to represent ownership of digital assets, create digital collectibles and can also represent ownership of physical assets In my view, NFTs play an important role for digital content creation, e.g. allowing artists to convert their art into a digital form and by doing so make it broadly tradeable. In addition, NFTs play an important role also in the metaverse and blockchain-based games, which are increasingly popular.

The goal of the article was to provide some guidance through the jungle of Swiss tax law provisions and to summarise our preliminary view of the applicable taxation principles to NFT because the Swiss tax practice does not yet cover or specifically mention NFTs.

As we have outlined in the article, there are different angles for a taxation in Switzerland and we wanted to thus contribute to utmost legal certainty for potentially interested investors or sellers of NFTs.

In your article, you make clear that NFTs could encounter capital gains and wealth taxation but highlight some challenges, could you make this point clear?

NFTs in principle are digital assets, which fall within the scope of Swiss income and wealth taxation. The Swiss tax system provides, however, an attractive exemption for Swiss resident individuals that hold or sell NFTs as part of their private assets, as resulting capital gains would in principle be fully exempt. There are, however, certain limitations to the possibilities of benefitting from a tax-free capital gain, which we have outlined in the paper. Especially in case an individual trades high volumes and possibly also uses debt to finance the transactions, it could be considered a commercial activity, making the income fully taxable and subject to social security contributions. The tax authorities would for example also typically deem an algorithm-based trading a commercial activity.

Swiss wealth tax lies between 0.1% and 1%. The taxable basis for wealth tax, in my view, also includes digital assets and thus also NFTs. However, the tricky part with NFTs would be their evaluation. In fact, many people buy NFTs and hold it just for a few years or longer and the question is how you can evaluate it because of its difficulty to establish the fair market value of an NFT as uniqueness is its key feature.

You also suggested that Swiss VAT is not directly applicable to NFTs but underlined the importance of KYC from a VAT perspective, why is it so?

I need to correct the question a bit: in principle, we have outlined in the article that we consider the sale of NFTs to qualify as the supply of a service. From a Swiss VAT perspective, the place of supply for such services would be determined based on the residency of the recipient of the service. So in the end, if a Swiss taxable person is commercially active and generates revenue of at least CHF 100.000 per annum from taxable services in Switzerland or abroad, a Swiss VAT liability may be triggered, and the transaction would in my view be subject to Swiss VAT at a rate of 7.7% (with an exemption from taxable service qualification possibly applying for art NFTs directly sold by their creator). So, I think for Swiss resident sellers, KYC is thus important to be able to track the residence of buyers and assess and document relevant VAT implications. I know that from a practical perspective KYC is not always easy for companies, this is why it would be interesting to investigate how technology can help in this regard.

Similarly, a Swiss VAT liability could by the way in a worst case be created for non-Swiss resident sellers of NFT, selling to Swiss resident non-VAT registered buyers, in case the NFT would qualify as an electronic service. I understand, however, that there are different opinions on this topic and it is possible that the Swiss Federal Tax Authority assumes a “normal” (i.e. non-electronic) service. Switzerland has a very well-working tax ruling process – it is definitely recommended to discuss the tax qualification of any relevant NFT with the Swiss tax authorities and obtain an advance tax ruling on this.

Other countries like Spain have commented that their VAT system also extends to NFT sales, do you think Switzerland will follow? What are the challenges connected to such a development?

Except for the exemption that is already mentioned, the tricky part seems to be to get qualification of each and every type of NFT right. This makes the publication of relevant practice more complex.

What might also be a challenge are the differing VAT systems in the various jurisdictions- the EU being an exemption - with a different level of published practice, as the seller of NFTs with buyers on a global level needs to analyse its relevant VAT position. Per my understanding, various jurisdictions foresee a VAT liability of a foreign provider of electronic services to non-VAT-registered local recipients – at least above certain thresholds. Industry players need to allocate sufficient resources into tax compliance.

Do you have any advice for legislators which can help them gain more resources from the crypto world without making it a burden for the industry?

I think that the goal for any legislator is to provide utmost legal certainty for any relevant stakeholder, whilst ensuring a tax-attractive environment.

In order to achieve that, it is important that the regulator has a sound understanding of the crypto industry and properly monitors the relevant trends and engages in a regular informal exchange with industry players or industry groups.

The Swiss Financial Market Supervisory Authority (FINMA) and the Swiss tax authorities published the first practice quite early, I think one of the first countries with published practice and I think that also helped to attract many promising crypto projects, because of the legal certainty it generated. The challenge now is to uphold the attractive environment and not lose the momentum, as other jurisdictions are also picking up speed and offer attractive packages, for example free trade zones.

Another positive development is that Swiss tax authorities are very easily approachable and new projects can get an advance tax ruling confirmation relating to the tax treatment before even starting. This provides legal certainty for the taxpayer.

Lastly, why should young people be interested in the world of taxation applied to Web3?

I think Web3 already offers so many possibilities but it is still at the very early stage. However, the environment will further develop and will be more and more important for our economy. I feel that for young people, Web3 gives promising business perspectives for the future. For young investors especially, I would strongly recommend not to neglect tax compliance and be aware of all the requirements of the environment before making any decision.