Switzerland: VAT analysis of tokenized commodities trading

The practice and guidelines around tokens and valued added tax (VAT) are still very new and incomplete from a Swiss VAT perspective. Every token must be analyzed and classified on a case-by-case basis, as even minor differences in the characteristics of the token can lead to a different VAT treatment.

To help illustrates these issues, an analysis of the Swiss VAT treatment of a tokenized commodity (coffee) is set out below. 

Tokens are digitalized assets using distributed ledger technology such as blockchain. Currently very popular tokens are non-fungible tokens (NFTs) which are used primarily to represent assets such as real estate, art, or virtual collectables. Fungible assets can also be tokenized, however, such as cryptocurrencies, commodities and financial instruments, among other things. 

The tokenization of commodities presents great potential for financial markets. While for some commodities such as gold, the market is rather liquid, other commodities are almost exclusively traded by larger corporates via bilateral agreements. Tokenization could eliminate the entry barriers and open market access to smaller participants. 

A buyer intends to buy a tokenized commodity via an electronic platform operated by a Swiss entity. The token represents the right of its holder to purchase a certain commodity at an agreed price, for example 1 kilo of coffee beans. The result of exercising the token is the physical purchase of 1 kilo of coffee beans. The token can be traded in a simple and secure way on the Swiss platform – in return, the platform may charge access/membership/transfer fees.

From a Swiss VAT perspective, the implications and risks for each participant in the different transactions arising from trading and executing the token need to be assessed.

The token could be classified as a payment token, e.g., it could be used as a means of payment to purchase coffee beans. On the other hand, the token has close similarities to a “call option.” If a token gives the entitlement to derivative rights or the like, it could also be categorized as an asset token based on the practice of the Swiss Federal Tax Administration (FTA).

The categorization depends on multiple criteria, for example, if the price for the commodity must be paid separately or not. Another question is if the token is secured by any guarantee or collateral. Depending on the characteristics of the token, it is even possible that the token is so unique that the general approach to distinguishing between the three main types of tokens (i.e. payment token, utility token, asset token) for tax purposes makes no sense at all and another solution must be found. The current practice is rather vague in this regard and therefore, a separate assessment of each token with the FTA may be necessary. Besides this, it must be evaluated whether the provision of any electronic service is involved in the transaction.

Depending on the perspective of the involved parties (Swiss/foreign seller or buyer) the following topics/questions should be considered when analyzing the Swiss VAT consequences:

• Qualification as payment token: generally irrelevant from a VAT perspective
• Qualification as asset token: generally Swiss VAT-exempt-without-credit transaction in the field of money and capital – however, maybe an exception applies (for example if a derivative right is linked to a physical delivery of a commodity – does the delivery effectively take place or was the token bought for speculative purposes and if yes, where does the delivery take place?)
• Token sold to a foreign buyer: a foreign VAT liability could be triggered for the seller
• Qualification as an electronic service: selling the token to a Swiss buyer could result in a taxable supply in Switzerland and may trigger a Swiss VAT registration (ruling recommended) – particularly relevant for foreign sellers
• Qualification as an electronic service: depending on the characteristics of the token, the purchase from a foreign seller could lead to the liability of the Swiss buyer to account for Swiss reverse charge VAT 

In the example case described above, under consideration of their specific transaction, the sale of the token was considered as Swiss VAT-exempt-with-credit as the place of supply was abroad. It was recommended to file a ruling with the FTA if the token would be sold to Swiss recipients, as it cannot be ruled out that the transfer/sale of the token qualified as an electronic service and as such might trigger a taxable supply / VAT registration in Switzerland. The FTA’s current practice requires a case-by-case assessment. The electronic service can only be excluded for sure if the token qualifies as a payment token. 

The transaction qualifies as physical supply of goods. Based on this, the VAT treatment depends in general on the place of supply. It must be evaluated as to whether the traded commodities are traded in or through Switzerland in order to determine the applicable Swiss VAT treatment. 

It must be evaluated if the services provided by the Swiss platform qualify as electronic services for Swiss VAT purposes. In the case of an electronic service, the recipient’s domicile is decisive for the Swiss VAT treatment. 

Read a May 2022 report prepared by the KPMG member firm in Switzerland