Tax questions are one of the most pertinent when speaking about the benefits of the Token Incentive Programme (TIP). Although we cannot give you tax advice, here are some answers we can provide to make it easier for you to identify the tax risks.
Granting the Tokens should not raise tax issues for the company giving the tokens or the participants receiving them.
This is because the Tokens are assumed to be valueless at the time of issuing. Token holders do not possess rights equal to those held by the shareholders. Tokens are not tradable. Tokens do not even give a possibility to have any share in the company. Tokens are merely a technical solution for granting their holders a future promise that will become valuable at the moment of redemption.
The Estonian Tax and Customs Board has agreed to our view regarding the value of the tokens when issued. Also, our legal research in several other countries has confirmed the same.
The next step is the redemption of Tokens which occurs when shareholders decide to sell their shares in the Company - that is the exit event. In line with the TIP, the Company buys the Tokens back from their holders, and the Participants receive monetary payment in proportion to the actual shares sold by the shareholders. Still, no actual shares will be assigned to the Token holders; only the amount payable is related to the price of the exit deal.
Redeeming Tokens will most probably trigger income or profit taxes. On the other hand, the answer to the question of value-added tax (VAT) may vary.
Participants receive income when the tokens are redeemed; therefore, they are likely required to declare and pay income tax in their country of residence in line with the rules effective there.
Income from the redemption of tokens can be treated as a capital gain from the sale of the token. The difference between the acquisition and sales price is typically taxed in such cases. Since the acquisition price is zero, the entire gain could be taxed. The tax rates and exact rules should be checked in your country of residence.
However, the redemption payment made to the employees can often be income from employment, especially if the employer granted the Tokens as a work-related bonus. Usually, it means that the payroll taxes have to be paid, including the social security contributions.
That is why it is good to know that if you are an Estonian resident employed by an Estonian company, the redemption payment can be treated as a capital gain, and no payroll taxes are withheld. The Estonian Tax and Customs Board confirmed it in a situation where the tokens are redeemed via payments from the equity, which are taxed at the Company level.
Taxation of the Estonian company is essential to explore to understand the tax authorities' view. Taxation of corporate profits ****differs in Estonia as compared to other countries. Profits are not taxed when earned but only when they are distributed. Therefore, the payments made from the equity can also be taxable at the Company level.
As explained above, granting valueless tokens does not create any tax liability. Redeeming tokens may still be a taxable payment for the Estonian company if the payments are made out of the company's equity because such payments are treated similarly to profit distribution. Taxable is the amount of the payments that exceed the contributions made previously to the equity; therefore, the exact tax amount depends on each company's circumstances.
Value-added tax issues may arise when the redemption payment is made to a VAT-liable person. Transfer of the Tokens can be seen as a service such Participants provide. The tax treatment then depends on the views of the particular country since there is no clear guidance on how such exact tokens should be considered under the VAT rules.
In some countries, the transfer of our Tokens would be out of the VAT scope; in some countries, exempt as a supply of financial services; in other countries fully taxable at a standard VAT rate as there is no exception to be applied. We will provide updates if there are any, but so far, we suggest asking your local tax authorities to be absolutely sure.