Switzerland: Blockchain services partially taxable and partially non-taxable for VAT purposes

The Swiss Federal Administrative Court held (A-5638/2022, dated 29 August 2023) that a taxpayer providing validation/verification activities in blockchain networks carried out two independent services for value added tax (VAT) purposes:

• Taxable transaction processing service for which the taxpayer collected a transaction fee
• Non-taxable “remaining” validation/verification activities provided to the blockchain network for which the taxpayer received block rewards 

The taxpayer's activities on the Polkadot and Kusama blockchains resulted in both block rewards and transaction fees and included operating software and network nodes as well as producing, validating, and finalizing new blocks on the respective blockchain network and validating transactions commissioned by senders or incorporating such transactions from a transaction pool into new blocks on the relay chain (“transaction processing”).

Under the tax authority’s initial guidance from 17 June 2019 (VAT information, 04 – “Subject to VAT”, sec. 2.7) on the VAT qualification of transactions related to blockchain and distributed ledger technology, if a validator’s activities are solely compensated by block rewards generated automatically by the network, it does not constitute a supply but is rather qualified as a non-remuneration (Art. 18 Swiss VAT Act). If, however, the validator receives a transaction fee, the validation or verification activity qualifies as electronic service which is taxable when the service recipient is established in Switzerland (recipient-location principle, Art. 8 para. 1 Swiss VAT Act). The tax authority argued that when a validator’s renumeration is based on the block reward and the transaction fee, like the taxpayer in this case, the validator's activities must be treated as taxable electronic services.

The court found that the taxpayer’s transaction validation/verification activities served the transaction senders and thus such senders were the service recipients. Because the transactions senders could be sufficiently identified, the transaction processing qualified as a taxable supply of services. The remaining validation/verification activities of the taxpayer were primarily aimed at the operation or the basic functionality of the blockchain and thus did not serve any specific sender, particularly since these activities were carried out irrespective of whether the block produced contains transactions or not. All network participants benefited from the update of the blockchain or the production of new blocks. Consequently, there was no identifiable service recipient and no service relationship in a VAT sense, and the block reward received in that case qualified as a non-remuneration. 

The court rejected the tax authority’s position that validation/verification activities always qualify as a combination of supplies, because such supplies are provided by the validator to different service recipients (sender and decentralized blockchain network). Rather, the transaction processing and the remaining validation/verification activities of the validator may be treated independently for VAT purposes.

Read an October 2023 report prepared by the KPMG member firm in Switzerland