11 June 2024

DAOs, protocols and value added tax

  • Articles
  • Tax
  • Blockchain / Digital Assets

The approach that "cybernetic", self-managed blockchain systems and DAOs can qualify as VAT-relevant subjects has been discussed in the literature for some time. The Federal Tax Administration (FTA) is now following this view for the first time. Decentralised groups of persons can therefore be recipients or suppliers for VAT purposes.

  • Thomas Linder

    Tax Partner

In principle, all "VAT-relevant subjects" can be considered as recipients or suppliers for VAT purposes. These are subjects that can at least theoretically also become taxable. Legal form and legal capacity are expressly irrelevant in this respect. The only decisive factor is that the subject acts as such to the outside world and thus enters into obligations towards the recipient and provider of services under its own name, i.e. recognisably independently and not as a representative or auxiliary of another person. In the case of groups of several persons, it is the overall organisation that acts externally and not the individual members. In contrast, a purely internal organisation is not capable of becoming a taxable entity due to its lack of external presence.

According to earlier information from the FTA, however, automated software protocols that merely carry out pre-programmed actions do not have legal subjectivity. Accordingly, they are also not businesses within the meaning of Art. 10 para. 1 of the VAT Act and therefore cannot be service providers or recipients. This interpretation was heavily criticised in the literature. The FTA has now apparently revised its practice in this regard and adjusted it as follows:

In the case of supplies to blockchain or DTL protocols, the first step is to determine the recipient of the supply. Which party is deemed to be the recipient of the supply for VAT purposes in such cases depends directly on the party to which the protocol is attributable or which party actually has the power of disposal over the protocol. Only in cases in which no identifiable party has the power of disposal over the protocol in question does the FTA assume that no supply relationship exists due to the lack of identifiability of the recipient of the supply. In such a case, the cash flows received as consideration for the provision of services qualify as non-remuneration, which the taxable service provider does not have to settle with the FTA (see MI 04, section 2.7.3.5).

In the case of protocols that are controlled by a decentralised group of persons (decentralised autonomous organisation, DAO), for example, if a binding vote is taken on protocol amendments using the governance function, the FTA assumes that the recipient of the service can be determined. The same applies to protocols that can be controlled by a single person ( individual, legal entity or group of persons). In these cases, the amount paid by the protocol for the receipt of the service is not a non-remuneration, but a remuneration for a service that must be settled with the FTA depending on the type of service. The decisive factor for assessing whether the remuneration for a service is remuneration or non-remuneration is the time at which the service is provided. Whether the power of disposal lies with an identifiable party must be re-examined for each service at the time the service is provided.

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The principles of freedom of evidence and free assessment of evidence apply to the proof of the place of performance. Due to the anonymity of blockchain protocols, the FTA allows approximate determinations to be made to determine the place of business (e.g. using IP addresses or country queries as part of voting). Provided that the taxable person can credibly demonstrate that the majority of the tokens are presumably held by users domiciled abroad, any supply to the protocol is therefore deemed to have been made abroad and is therefore not subject to domestic tax (Art. 8 para. 1 MWSTG in conjunction with Art. 18 para. 1 MWSTG e contrario). However, the purchase of services from the protocol would be subject to acquisition tax (Art. 45 ff. MWSTG).

This new interpretation is very welcome, as it reflects the reality of "cybernetic", self-managed blockchain systems and DAOs. According to the current legal situation, these can therefore constitute a subject relevant for VAT purposes and can therefore be considered as a supplier or recipient of services. The joint external appearance is sufficient for this purpose. Legal form and legal capacity are expressly not decisive.
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