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VAT is one of those topics in the crypto sphere that has gained more and more attention over time. The understanding of this topic varies from person to person. Therefore it comes as no surprise that various interpretations have been given to two important criteria — “taxable” and “non-taxable” (exempt).
In this guide, we’ll clear up these terms and shed some light on how transactions are classified in these two categories within the scope of VAT. To do so, we’ll look at how revenue generated through the tokenisation of digital assets is regarded by the tax laws that implement VAT.
Taxable and non-taxable supply
In the scope of VAT, revenue is divided into taxable and non-taxable (exempt) supply. Non-taxable revenue can be tax-free (such as financial services and certain social services) and “nothing” (meaning it is outside the scope of VAT).
Why all the above is important? Understanding the classification of a transaction as tax-free or “nothing” is crucial because it determines whether VAT should be added to the sales price of the goods or services and whether the company is entitled to deduct input VAT of goods and services acquired for this revenue. For example, revenue from issuing tokens and mining is considered “nothing,” while issuing NFTs is considered the sale of immaterial assets and is taxable.
Who has the right to deduct input VAT?
The company cannot avoid VAT registration and paying tax if the company receives certain services from other states (EU or non-EU); it is obliged to register as a person liable to VAT with limited liability. A person liable to value-added tax with limited liability shall pay value-added tax only on goods and/or services acquired from a company of a foreign country that is subject to reverse charge in Estonia and goods imported to Estonia. A person taxable with limited liability is not entitled to the right to deduct input VAT.
The company can also register as a person liable to value-added tax (full liability). 22% VAT on purchases must be paid by the person liable for VAT only if he has purchased a service for “non-taxable” or “nothing” revenue.
Services belonging to the reverse charge mechanism
The only difference between the supply of “nothing” and tax-free is that for “nothing,” there can be no VAT refund for any of the services or goods purchased. If a company purchases services or goods for tax-free revenue from outside the EU, they can use a full reverse charge mechanism and don’t have to pay 22% VAT from services bought. However, for services from the EU, 22% VAT still has to be paid in Estonia.
The services that belong to the reverse charge mechanism are:
- grant of the use of intellectual property or transfer of the right to use intellectual property;
- advertising services;
- services of consultants, accountants, lawyers, auditors, and engineers, translation services, as well as data processing or the supplying of information;
- financial services, except for leasing safes, or insurance services, including reinsurance and insurance intermediation services;
- allowing the use of manpower;
- the hiring or leasing of or establishment of a usufruct on movables, except means of transport;
- electronic communications service within the meaning of the Electronic Communications Act, including the assignment of the right to use transmission lines;
- electronically supplied services;
- allowing access to natural gas or electricity, heating and cooling energy network connections, and transmission of natural gas or electricity, heating or cooling energy through networks and services directly related thereto;
- transfer of permitted limit values of emissions of greenhouse gases regulated by the Atmospheric Air Protection Act;
- refraining from the services specified in clauses 1–10, waiving the exercise of a right, or tolerating a situation for a charge.
A partial VAT refund
To be eligible for a VAT refund and use the reverse charge mechanism fully (not paying additional VAT), a company must have taxable turnover, and the goods and services purchased has to be related to taxable turnover. It is important to note that taxable turnover may also occur in the future. Example: development costs for a platform. Typically, platform development may take several years, but the input VAT can be refunded on time if the end result is expected to produce a taxable supply.
If a company uses goods or services for both taxable and non-taxable/exempt, the VAT refund will be partial. A partial deduction shall be based on the proportion of the total supply during a calendar year. The company may change the proportion of taxable supply with the written permission of the tax authority if the actual proportion of taxable supply to total supply in the current calendar year is substantially different. The deduction of input VAT of fixed assets and goods acquired and services received for the fixed assets shall be based on slightly different calculations.
Understanding the nature of your revenue = correct VAT calculations
The company may use either the method of proportional deduction or the method combining direct calculation and proportional deduction during one and the same calendar year.
In summary, understanding the nature of revenue and the reason for purchased services and goods is essential for correct VAT calculations and compliance with tax laws. As taxation often depends on the transaction´s individual details, please seek advice from your accountant or advisor before you make any transactions. It helps avoid mistakes and will save you time and money.
