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    * ON REAL ESTATE / ALTERNATIVE INVESTMENT FUNDS AND COMPANIES IN LUXEMBOURG
    * Crypto currencies

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   * ON REAL ESTATE / ALTERNATIVE INVESTMENT FUNDS AND COMPANIES IN LUXEMBOURG
   * Crypto currencies


NEW TAX CIRCULAR ON CRYPTOCURRENCIES IN LUXEMBOURG


18 FEB NEW TAX CIRCULAR ON CRYPTOCURRENCIES IN LUXEMBOURG

Posted at 15:21h in Allgemein by jinfatax

WHAT IS THE NEW LUXEMBOURG CIRCULAR ON THE TAX TREATMENT OF CRYPTOCURRENCY IN
LUXEMBOURG?



The new circular on the tax treatment of cryptocurreny in Luxembourg of 26 July
2018: What are the contents of the new circular on cryptocurrency?



The Luxembourg tax authorities have recently published their own circular on the
tax treatment of cryptocurrency. Circular L.I.R. n 14/5 – 99/3 – 99bis/3 of 26
July 2018 provides guidance on the tax treatment of cryptocurrency income for
individuals.



Cryptocurrency is considered an “intangible asset” in Luxembourg



The Luxembourg tax authorities point out that cryptocurrencies such as Bitcoin
do not represent legal currency, they are considered “intangible assets”.
Consequently, the current taxation regime for intangible assets will apply to
cryptocurrency income.



The Circular also clearly expresses that taxpayers are not permitted to prepare
or state their accounts for tax purposes or their taxable income in
cryptocurrency. In this sense, income, expenses and costs formulated in
cryptocurrency must be determined either in euros or in another legal tender
currency.



Furthermore, the use of cryptocurrency for payments does not affect the tax
nature of the income. For example, the rent of a flat paid in bitcoin does not
affect the classification of the rent as rental income in this case. The
statutory tax provisions apply according to the nature of the income.



The Grand Duchy of Luxembourg classifies the tax treatment of cryptocurrency as
either commercial or non-commercial activities.



Tax treatment as a commercial activity in Luxembourg



The tax treatment of income from business activities is specified in Article 14
of the Luxembourg Income Tax Law (LEStG). The circular states that the
generating of income from cryptocurrencies such as so-called “mining”, the
online operation of crypto-asset exchanges or the sale of cryptocurrencies is to
be assigned (for income tax purposes) to income from business operations in
accordance with Article 14 of the Income Tax Act if it should be a commercial
activity.



The following criteria can be used as indications for the existence of a
commercial activity:

 * Existing premises or an organisation intended for the operative performance
   of virtual cryptocurrencies;
 * financing through debt capital;
 * Frequent rotation of the stock of virtual cryptocurrencies;
 * Trading on behalf of third parties



Expenses resulting from this commercial activity, such as electricity costs used
for mining and/or conversion fees of crypto-asset exchanges, are only deductible
as business expenses if they are exclusively caused by the company pursuant to
Article 45 LEStG. In addition, the Circular states that income arising from the
activities of taxpayers subject to corporate income tax pursuant to Article 159
in conjunction with Article 162 LEStG is always deductible as business expenses.
Article 162 LEStG, must always be considered as a commercial activity.



Tax treatment of other income in Luxembourg



The taxable income category of other income is described in Article 99 in
conjunction with Article 99bis LEStG. Article 99bis LEStG. This tax regulation
only applies if no commercial activity according to Article 14 LEStG is carried
out. This means that any profit or loss resulting from cryptocurrency trading is
considered a speculative profit or loss if the holding period of the
cryptocurrency does not exceed six months. In the case of the conversion of a
cryptocurrency such as Bitcoin into another cryptocurrency or a legal tender
currency such as Euro or USD, this transaction is deemed to be an exchange of
assets under Article 102 (1a) LEStG. The taxpayer is then considered to have
sold the virtual cryptocurrency for consideration, followed by an acquisition of
a good or service received for consideration.



Treatment of cryptocurrencies for wealth tax purposes



For Luxembourg wealth tax purposes, which only applies to fully taxable
Luxembourg resident companies and is levied at a rate of 0.5% per annum,
cryptocurrencies must be valued in accordance with the provisions of the
Valuation Law, i.e. at market value.



Conclusion on the new circular on the tax treatment of cryptocurrency in
Luxembourg of 26 July 2018



The Grand Duchy of Luxembourg has decided to apply the current tax rules to
cryptocurrencies instead of finding new and up-to-date tax rules. The approach
to the tax treatment of cryptocurrencies in Luxembourg is strongly reminiscent
of the German federal government’s income tax approach to mining and exchanging
cryptocurrencies. See the statement of the German Federal Government of 29
December 2017 (Bundestag-Drucksache 19/370 of 05.01,2018, page 21 f.).
Unfortunately, the Grand Duchy of Luxembourg has thus sent a message that
cryptocurrencies and related businesses with cryptocurrencies are welcome, but
the Grand Duchy of Luxembourg will not become the European crypto paradise.
Other countries such as Switzerland, Austria or Malta are already much more
advanced in this respect with planned regulations or tax rules on
cryptocurrencies.



Please find here the circular on the tax treatment of cryptocurrencies in
Luxembourg in French.



Further considerations on the circular of 26 July 2018 and the classification as
a financial instrument in Luxembourg



One of the open and unfortunately also unresolved questions arising from this
circular of 26 July 2018 is whether the classification of a cryptocurrency as an
intangible asset is entitled to be extended to e.g. the Luxembourg law of 11 May
2007 on the Luxembourg Société de gestion de Patrimoine Familial(“SPF”).
According to this law, an SPF can only own financial instruments (meant in the
broadest sense), while at the same time it may not engage in any active
operational business activities (private asset management). Would an SPF be
allowed to own cryptocurrencies in the context of private asset management?
Unfortunately, the answer remains unclear.



In Luxembourg, the SPF is not supervised by the direct tax administration but by
the Luxembourg indirect tax authority (Administration de l’Enregistrement et des
Domaines). Thus, the present circular of 26 July 2018 (issued by the direct tax
authorities) would not necessarily have to prevent SPF from holding
cryptocurrencies as private asset management under the law of 11 May 2007.

Nevertheless, whether or not cryptocurrencies should be considered as financial
instruments is currently under consideration by most financial authorities
around the world, and the answer is still unclear in most cases. Certain foreign
financial authorities have issued guidelines or tests to determine on a
case-by-case basis whether or not a cryptocurrency should be treated as a
financial instrument, and we also believe that cryptocurrencies may develop
other attributes over time (e.g. stability, government support) and fit more
into the definition of financial instruments.

This situation is expected to evolve in the near future as cryptocurrencies, ICO
and blockchain gain legitimacy and shift towards the traditional financial
system.
Finally, it should be noted that the Luxembourg indirect tax authorities issued
Circular No. 787 on 11 June 2018 based on a recent ECJ case law confirming that
cryptocurrencies, like traditional currencies, should benefit from the exemption
provided for in the VAT Directive No. 2006/112/CE, provided that these
cryptocurrencies are a direct means of payment and are accepted as such by
certain market participants. See our following post VAT exemption for
cryptocurrency in Luxembourg on this topic. Although not all cryptocurrencies
are designed as a means of payment, it seems clear that some meet this condition
such as Bitcoin, Litecoin, Nano etc…. and should therefore be a suitable asset
for a Luxembourg SPF.



Your tax advisor in Luxembourg for cryptocurrency



We at jinfa S.à r.l. are tax advisors and Expert-Comptable in Luxembourg and
have many years of experience in providing tax advice to international
holding/financial structures in the field of renewable energy/real assets and
private equity as well as to internationally operating industrial, trading and
real estate companies.



Our office is characterised by a high level of experience gained through working
in leading positions in international banks, Big 4 accounting firms or
investment management companies.



Please contact us if you have any further questions!

TAGS:

bitcoin, blockchain, crypto, crypto coins, crypto currency, cryptocurrency,
expert-comptable, financial instrument, ICO, Luxembourg, mining, SPF, tax
advisor luxembourg, tax treatment, wealth tax
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