The virtual currencies from Slovak tax and accounting point of view.
Trading with the virtual currencies became an increasingly discussed topic. However, until today, the legal provisions on the accounting and taxation of virtual currencies were missing in Slovakia. Therefore, the Slovak Ministry of Finance issued the first Methodological Guideline on the taxation and accounting of these virtual currencies in March 2018 and also the amendment of the Income Tax act and the Act on accounting was approved in June 2018.
Unfortunately, unlike other countries (which are more friendly to virtual currencies and no taxation or some exemption are applied, e.g. Switzerland, Denmark, Belarus or Germany) Slovakia has chosen to use virtual currency taxation.
In practice, according to the above-mentioned new legislation, any exchange of virtual currency, including an exchange for another virtual currency and exchange for a service or an asset is treated as a sale of the virtual currency.
From the Slovak accounting point of view, the virtual currency is considered as an asset, specifically defined as a short-term financial asset other than cash and should be recorded in the EURO currency for the purposes of
preparing the financial statements. The virtual currency is valued in the accounting at real value. The real value for a virtual currency is considered to be the price found in the public market in a way chosen by the entity. The exchange differences due to the revaluation in the end of taxable period should not be accounted for. These valuation rules of the virtual currency will be used for the first time during the preparation of the financial statements at 1 October 2018.
The new legislation also deals with determination of the input prices of the virtual currencies and of assets and services acquired for a virtual currency. It is necessary to distinguish the moment of revenue/income recognition
separately from the sale and separately from the exchange of virtual currency. When selling a virtual currency, it is booked as revenue/income at the time the transaction is confirmed in the blockchain (note:
blockchain might be simply explained as an incorruptible digital ledger of economic transactions that can be programmed to record not just financial transactions but virtually everything of value) and in case of the exchange
of the virtual currency at the time of the two transfers.
The income from such sales shall be included in the tax base (i.e. including an exchange of one virtual currency for another virtual currency). The income included in the tax base is determined by using a fair value at the date of
exchange, while the fair value is the market value from the selected public market at the day of sale. The total amount of input values of virtual currencies could be reflected only up to the total amount of revenues derived
from sale of virtual currencies, i.e. possible losses will not be included in the tax base.
For the corporate entities, the taxable income from the short-term financial assets is subject to 21% corporate income tax.
As regards the taxation of individuals, the income from sale of virtual currencies is included under Section 8 of the Income Tax Act (i.e. other personal income) and thus, will be subject to 19%/25% income tax and also to the health insurance.
From the Slovak value added tax (VAT) point of view, the virtual currency is neither specially treated in the VAT act, nor in Methodological Guidelines. Generally, the purchase and sale of the virtual currency for the purpose of its future valuation, is considered a taxable transaction from the VAT perspective. Since they are regarded as financial services, the purchase and sale of the virtual currency is exempt from the VAT. This Slovak approach is also in line with ECJ case no. C-264/14 Skatteverket/David Hedqvist.
Following to the above mentioned, in case of trading with virtual currency, it is recommended to consider any potential tax implications in advance.
Slovakia might be a pioneer in the taxation of the digital platforms
While the European Union has been already working on a new legislation addressing the taxation in sharing/digital economy, Slovakia has arrived with its “own solution” in this area.
The Slovak Ministry of Finance, with the aim to address the challenges of taxing modern digital business activities, introduced with effect from 1 January 2018 the broader local definition of permanent establishment (PE).
The recurring services of mediation of transport and accommodation even if they are performed through a digital platform (e.g. Uber, Airbnb and booking.com) are considered as the activities carried on through a
permanent place in the territory of Slovakia and thus, lead to creation of a PE.
The foreign operators of such digital platforms are obliged to register for the income tax purposes in Slovakia. According to the publicly available rulings of the Slovak Ministry of Finance, the operators of digital platforms
create a PE in Slovakia with no regard to the fact if they come from a state with which Slovakia has a double taxation treaty, or from the states that Slovakia does not have a double taxation avoidance treaty with.
In the case the tax registration obligation is not fulfilled, the payments for mediation services shall be subject to a withholding tax, i.e. the Slovak tax resident using the platform for the sale of their services must deduct tax from
the payments made to the platforms for the intermediary service provided. Since the Slovak Tax authorities does not want the tax liability transferred to the domestic providers of transport and accommodation services, a notification campaign has begun to inform foreign operators of their obligation to register a PE and warn them that if they fail to meet their obligation, they will be registered by the Slovak Tax authorities.
The Slovak Ministry of Finance explained that the aim of this new legislation was to secure a fair business environment so that local entrepreneurs paying taxes in Slovakia were not put at a disadvantage compared to those
who intentionally shift their profits from Slovakia into a jurisdiction with low or zero tax duty.
Daniel Martiny, Daniel.Martiny@vgd.eu