Tax Alert No. 33 - 

International taxation  11.4.2019

Report by the Security Authority’s Committee in Connection with the Issuance of Crypto-Currencies and the Tax Implications - 11.4.2019

In March 2019, the final report by the Security Authority – The Committee for the Arrangement of the Issuance of Distributed Ledger Technology Based Crypto-currencies to the public. The final report was published after the publishing of a very detailed interim report, which was presented to the public in March 2018. The Committee’s main role was to consider the application of the Securities Law to the issuance of crypto-currencies.
A year has passed since the publication of the interim report, and very significant changes have occurred in the crypto industry, including – the collapse of the market value of the currencies and of the volume of trading, a significant decrease in ICO recruitment, and a reduction in the field of STO recruitments. A short explanation of the terms: The term ICO (Initial Coin Offering) means the process of issuing tokens. The term STO (Security Token Offering) means the issuance of a token that has characteristics of a security (for example – a token that affords rights in assets or which affords part of the profits of a project and etc.).
The final report details the main factors that have molded the principal changes in the past year, including the issue of Regulation. Many countries across the globe, headed by the United States presented a tough position regarding the field of crypto issues – a position pursuant to which most of the issues of tokens (ICOs) constitute the issuance of a “security”. The significance of the application of the Securities Law to the issuing of tokens was especially hard for parts of the industry who believed that the existing regulations are not appropriate and do not apply to recruitments of funds in this manner. The result of the toughening of the regulations globally regarding this field has been the undertaking of defensive activity, such as the imposition of self-regulations – an approach to qualified investors alone (those who can be offered securities without a prospectus), taking note of the prohibition of money-laundering laws and the examination of the investors’ source of financing and the execution of know your customer (KYC) processes.
The main recommendations in the final report are the application of a special disclosure regime for offerings of tokens within the framework of the Securities Law, the enabling of regulatory reliefs and the creation of the conditions for use within the framework of a “regulatory sandbox”, consideration of the possibility of arranging a special platform for trading in crypto assets and consideration of a “crowd financing” model for ventures in the field. Our firm has accompanied and is accompanying a number of groups that were in various stages of offerings by issuing tokens – and tax questions arose in all of those groups, as well as regulatory issues. In our experience, most of the ventures chose to execute the offering by means of the establishment of a foreign corporation that is located in a country in which the regulations are “friendly” to the crypto industry (such as Gibraltar and Switzerland), and this is inter alia, with the objective of meeting the regulatory requirements. It is clear that the issue of incorporation is only one of the numerous other regulatory aspects that need to be examined, such as the classification of the tokens, who is permitted to offer them, consultancy and the holding of tokens, banking, prohibition of money laundering laws and so on.
In the examination of the tax aspects, our recommendation is to make an approach for a tax ruling from the Tax Authority within the framework of the offering of tokens, which is in light of the publication of a professional circular by the Authority (Income Tax Circular – ICO – The offering of “Digital Tokens”, for the provision of services and/or products in development (Utility Tokens), in order to obtain certainty regarding the recognition of the income by the issuing company as a result of the offering of the tokens, the timing of the recognition of that income and the amount thereof, tax aspects regarding employees and providers of services who receive tokens, VAT implications and an attempt to understand the tax implications in the hands of the entrepreneurs who will hold tokens.
We would clarify that the said circular applies to the issuance of utility type tokens, to differentiate from security type tokens. In respect of the latter (which below to STO offerings), the Tax Authority is currently working on the publication of a draft circular in which it will express its opinion.

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