The Complete Malta VFA Tax Guideline

The Complete Malta VFA Tax Guideline
Updated on
January 26, 2023

At the beginning of November 2018, a guideline on how to treat stamp duty, income tax and VAT on transactions that involve Digital Ledger Technology assets was issued by the Malta Commissioner for Revenue as part of the VFA tax Act. In the guidelines, the DLT assets were classified into coins and tokens, with the tokens further being classified into financial tokens and utility tokens. The guidelines came in three sets, with each set covering either the income tax, stamp duty or the VAT.

The Virtual Financial Assets Law signals the beginning a new reign which regulates the Digital Ledger Technology Assets together with related subordinate services and offerings including the Tokens, Initial Coin Offerings (ICOs); Exchanges, and Virtual Financial Agents.

Initial Coin Offerings (ICOs) is a way of raising funds to build cryptocurrency companies whereby an issuer offers virtual financial assets to interested investors in exchange for funds. The interested buyers will buy into the offering through fiat currency or other pre-existing tokens such as bitcoin or ether. Virtual tokens, on the other hand, are defined as tradable assets that can be used to exchange services and products. There are different types of virtual tokens including the financial token, the utility token, and the hybrid token.

The VFA Tax Guidelines specify that VAT, stamp duty, and income tax handling of any Digital Ledger Technology Asset will be reliant on the need for which it is used not the category in which it falls.

About Initial Coin Offerings (ICO’s)

Initial Coin Offerings refer to a funds raising mechanism method where an issuer floats virtual financial assets to interested investors in exchange for funds. The raised funds will be used to run the services of the new DLT or Blockchain. According to the VFA Tax guidelines, the funds that are raised from the issuance of financial tokens during the initial offering will not receive treatment like it were income to the issuer in regards to income tax nor will new token issuance be regarded as capital gains transfer for purposes of tax.

VAT Guidelines Regarding ICOs

According to the VAT guidelines, an ICO can receive treatment beyond the VAT scope if at the time of the ICO issue, there is no identification of a specific service or a fixed price for the goods is provided. Moreover, the ICO can be out of VAT scope if it is impossible to determine whether the purpose of the project will be realized. However, if the tokens floated at the ICO point would give the buyers and investors rights to particular goods and services for a specified amount of money, this would give rise to a chargeable event and therefore the regulations that apply for the financial tokens offered at ICOs would be implemented.

Guidelines Involving Financial And Utility Tokens

Under the guidelines, tokens classified in to utility, financial, and hybrid.

1. Financial Tokens

Financial tokens refer to Cryptocurrency Assets that can be traded as securities to interested buyers who want to join the new Cryptocurrency network. Financial tokens exhibit characteristics similar to those of the physical equities found in corporate companies.

2. Utility Tokens

Utility tokens refer to Cryptocurrency assets that can only be used to trade within a specific exchange platform. They cannot, therefore, be used outside a particular cryptocurrency platform and is intended to grant access and rights to investors trading in the same exchange platform.

3. Hybrid Tokens

Hybrid tokens grant Blockchain traders access to exchange platforms or allows them to use rights in a product offered by a specific project and can also be purchased by investors for investments purposes as long as it does not have the basic elements of a security asset.

The financial token returns will be treated as income and therefore used for income tax purposes. Tax treatment will depend on the type of transfer, which can either be a trading transaction or capital asset. Trading profits are subjected to tax while taxation on capital gains is effected when the tokens meet the definition of the term ‘securities’ according to the Income Tax Act.

Exceptions To The VAT Implications Regarding The Financial And Utility Tokens

VAT Guidelines state that the issuer will not be taxed if the financial tokens are issued to raise capital. Taxing is not allowed in this scenario because capital raising does not constitute selling of goods and services to make a profit.

As for the utility tokens, the issuer is likely to get his income taxed because the issuance of utility tokens is considered a sale of goods and services. This means that you can make a lot of profits when you sell the tokens to investors and buyers.

According to the guideline, hybrid tokens being used as utility tokens will be treated as utility tokens and if it used as a financial token, then it should be liable for the VAT implications involving financial tokens.

Transactions Involving Coins

Transactions involving coins can be taxable depending on whether one is a capital or trading transaction. The VFA Tax guidelines clearly state that profits accrued from any transaction involving the exchange of coins should receive the same treatment as profits accrued from trading using the fiat currency. From an income tax point, coins should, therefore, be included in the scope of capital gains taxation.

Trading of cryptocurrencies for fiat currencies or other cryptocurrencies involving the sale and exchange of products for profits should not be subjected to VAT under the exemptions of the currency and related services guidelines.

A coin’s value should be established based on published rates from the relevant authorities in Malta. When such rates are not present, an average quoted price shall be calculated based on at least three exchanges that are of unquestionable repute on the relevant transaction’s date or any other technique and strategy that meets all the guidelines set out by the Maltese Commissioner of Revenue.

VFA Guidelines Involving Digital Wallets

The VFA Tax Guidelines state that digital wallet providers will be exempted from VAT taxation if they offer their services such as handling of an exchange of various types of cryptocurrencies by operators at a fee. This is because the services they are offering meet the requirements to exempt taxes for currency transaction.

However, the digital wallet providers will be taxed if the nature of their transactions and profits meet the requirements to exempt the government of Malta from taxing them. For example, if you are offering a service that involves technology, then you will be taxed in VAT and Income tax. Therefore, you should keep an eye on the services you offer as a digital wallet provider to reduce the amount of taxation.

Guidelines For Cryptocurrency Mining

The VFA Act provides two guidelines about VAT on mining activities. First of all, a crypto miner will be exempted from VAT taxation because there is no direct service that somebody can use to gain profits by selling the mined tokens. Because there is no reciprocal performance between the supplier and the receiver, then, this transaction does not fall within the scope of VAT taxation..

Miners are liable to get VAT treatment when they gain profits from sale or provision of other services in which the customers were charged a specific amount of money per unit of service. In such cases, the Maltese government will charge the miner with both income tax and VAT depending on the amount of income accrued he or she accrued during the transactions.

VFA Act Guidelines For Exchange Platforms

The Maltese Government consider exchange platforms as normal corporate companies. And therefore if they make profits from transactions carried out by members of the platforms, then they are liable for taxation because they are treated like normal companies. The exchanges will be required to pay for all the taxes that apply to all the limited liability companies on the island of Malta. The VFA Act also considers the payment of transaction fee and subscriptions by members of the Platform as a factor that makes the platform providers liable for VAT.

Any transaction involving the supply of services that fall under Malta VAT scope will be taxed except where exemptions apply. Among the factors that must be considered when determining the type of VAT treatment for exchange platforms include the type of underlying service being offered, if the service is technological or if during exchange, there is an involvement that may cause the transaction being exempted from VAT. The VAT treatment of exchange platform services also depends on the number of profits the platform owners are realizing.

How To Treat Stamp Duty From DLT Assets Transactions

You will have to analyse whether the cryptocurrency assets such as the utility and financial tokens to be assessed have characteristics similar to securities found in the real financial market as defined in the Virtual Finance Assets Act. The analysis will help determine the type of stamp duty treatment that applies to the Cryptocurrency assets transactions. If the Cryptocurrency Assets are similar to the market securities, then they shall be subject to Stamp duty treatment in accordance to the provisions of Duty on Documents and Transfers Law.

More About The Guidelines

Even though the guidelines from the Virtual Finances Assets Act helps establish clarity and a better conceptualisation on how the existing rules and regulations are applied, there is need to treat each case separately when establishing a transaction’s income tax, stamp duty and VAT. According to the guidelines, income tax transactions completed in cryptocurrency are to receive similar treatment as that of payments settled using other currencies including those made using the Fiat currency.

Moreover, in instances where cryptocurrency is accepted by traders in the settlement of bills for goods and services, there is no change in the method of calculating accrued revenue and taxable profits. They will still be liable for the VFA Tax. Remuneration payments including salaries and wages will also be regarded as taxable according to the general principles of taxation. Also, according to the VFA Act, payments effected through utility or financial token transfer will receive similar treatment as that made from payment modes which are not exempted from VAT treatment.

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