The term “cryptoactives” encompasses the so-called “fungible tokens” and “non-fungible-tokens”. The latter (“NFT’s”) are digital units of value, that represent, amongst others, rights concerning works of art, games, moveable property, collectable items or financial assets that can be digitally traded between individuals or legal entities[i].
Restricting ourselves, for the purposes of this article, to the use of NFT’s as a mean to trade digital works of art (“Digital Art NFT’s”), we should start by saying that these “tokens” should be considered as digital certificates of authenticity, which are associated (by the use of a “blockchain” technology) to a single digital file. Meaning that there are two sets of assets: (i) the underlying digital asset (e.g., the digital work of art); (ii) and the NFT itself, which represents the digital ownership of such an underlying file (e.g., the NFT legally secures the underlying digital work of art).
Considering that, for the purposes of the European Union Value Added Tax System (EU-VAT)[ii], there is yet no case law by the European Court of Justice (ECJ), providing a judicial framework, concerning such NFT’s, one must take into account any instructions, guidelines and/or notices issued by the tax administrations of EU Member States.
In this sense, we would like to underline that the Spanish Tax Administration (“Agencia Tributaria Española“ or ATE) has already confirmed, through a binding VAT information (please refer to Point 4 of “Resolución Vinculante da Dirección General de Tributos, V0486-22 de 10 de Marzo de 2022”), our understanding that NFT’s represent the digital property of an underlying asset (in this particular case, a set of photography works, previously edited by the use of “Adobe Photoshop”), and, considering ECJ Case “Shipping“[iii] (that clarified the concept of transfer of goods) concluded that the selling of such NFT’s is not to be considered, for EU-VAT purposes, as a delivery of a physical merchandise, given that it does not provide, to the acquirer, ownership over a tangible asset/commodity.
Therefore, ATE concluded that such transactions must be qualified, for VAT purposes, as electronic services, because: (i) the selling of such NFT´s is made over the Internet (or any other electronic network); (ii) the nature of which renders such a supply essentially automated and involving minimal human intervention; (iii) and are impossible to ensure, in the absence of information technology[iv].
Furthermore, given the fact that NFT’s assign the ownership of an asset (i.e., in this case, a digital work of art), they must, therefore, be legally perceived as securities.
However, VAT is a tax on spending/consumption, which means that the mere ownership of securities is outside its scope, for it is not related with someone exploring the rights of a specific asset (i.e., it is not to be perceived as an economical activity), and the only consideration associated with such NFT’s is an (undetermined/hypothetical/future) earning, to be obtained upon its (eventual) transmission[v].
Nonetheless, the purchasing and selling of NFT’s must be subject to EU-VAT, as long as it involves the actual pursuit of an economic activity (on a continuous basis), that goes beyond the sheer holding, of such an NFT, as a security (as it is the case of brokerage services)[vi].
It is also relevant to underline the fact that any security, of a financial nature, is exempted from EU-VAT, in accordance with item (f) of paragraph 1 of Article 135 of the VAT Directive.
However, if a security does not have a financial nature (as it is the case of Digital Art NFT’s), such an exemption will not apply.
Nevertheless, one should also verify if Digital Art NFT’s transactions, in the context of an economic activity – which are, therefore subject to EU-VAT -, may benefit, in Portugal, from the exemption, specifically attributed to this Member State, in accordance with Article 371, conjugated with Part B of Annex X, both of the VAT Directive, to the supply of services by authors, artists and performers (a legal measure that was transposed to this national jurisdiction, by item 16) of Article 9 of the Portuguese VAT Act).
In order to do so, it is relevant to consider the following ECJ’s case law:
- Case “Leo-Libera”[vii]: where the Court took into consideration a “competitiveness criteria”, by which services or goods that compete amongst themselves, within a free market, must be subject to the same legal framework;
- Case “Abbey National”[viii]: where the Court considered the principle of substance over form (so to attribute the same legal effects to transactions that, despite having a different legal form, had the same economic substance);
- Case “Rank Group”[ix]: by which the Court instituted a “parity criteria” (i.e., goods or services that, from the perspective of the consumer, are identical or similar, and that satisfy the same consumption needs, must be subject to the same tax treatment).
Consequentially, it should be noted that:
- Given that item 16) of Article 9 of the Portuguese VAT Act, exempts copyrights, deriving from any of the intellectual works, mentioned in the Portuguese Copyrights’ and Related Rights Code (please refer to Decree-Law Nº. 63/85, of March 14th March);
- Considering that the legislator did not mentioned, in this legal act, the digital works of art, associated with Digital Art NFT’s, even though it mentions (i) works of cinematography, photography, television, phonographically, video and radio; (ii) drawings, paintings, lithography, and architecture;
- One must, nonetheless, conclude that: (i) NFT’s, whose underlying assets are digital works of art, fulfill the “parity criteria” (i.e., the works of art, specifically mentioned in the Portuguese Copyrights’ and Related Rights Code are identical/similar to the works of art, secured by a given Digital Art NFT, and satisfy the same consumption needs); (ii) and they also comply with the “competitiveness criteria”, since the intellectual works, mentioned in the Portuguese national copyrights’ legislation, compete with such NFT’s in the art market; (iii) the economic substance of these NFT’s is identical to such works of art.
Which means, in conclusion, that Digital Art NFT’s (when sold in the context of an economic activity) are entitled, in the Portuguese jurisdiction, to benefit from the VAT exemption, mentioned in item 16) of Article 9 of the Portuguese VAT Act.
Pedro Monteiro
Novembro 2022
To keep track of Law and ECJ case law:
[i] OECD “Crypto-Asset Reporting Framework and Amendments to the Common Reporting Standard – Public Consultation Document”, p. 40.
[ii] Currently in force, under the statutory terms and regulations mentioned in Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax (OJ L 347, 11.12.2006, p. 1).
[iii] Ruling of the ECJ, February 8th 1990, concerning Case C-320/88 (“Shipping”) ECLI:EU:C:1990:61.
[iv] Please refer to paragraph 1 of Article 7 of Council Implementing Regulation (EU) Nº 282/2011 of 15 March 2011 laying down measures for Directive 2006/112/EC on the common system of valued added tax.
[v] GRUBERT, HARRY e KREVER, RICHARD “Chapter 9: VAT and Financial Services” in “VAT Exemptions: Consequences and Design Alternatives”, Ed. Rita de la Feria, EUCOTAX Series on European Taxation, Vol. 37, Wolters Kluwer (2013), p. 317. TERRA, BEN e KAJUS, JULIE “A Guide to the VAT Directives – Introduction to VAT”, Vol. 1, IBFD (2016), pp. 1038, 1039.
[vi] TERRA, BEN e KAJUS, JULIE “A Guide to the VAT Directives – Introduction to VAT”, Vol. 1, IBFD (2016), p. 1039.
[vii] Ruling of the ECJ, June 10th 2010, concerning Case C-58/09 (“Leo-Libera Gmbh vs. Finanzamt Buchholz in der Nordheide”) ECLI:EU:C:2010:333.
[viii] Ruling of the ECJ, May 4th 2006, concerning Case C-169/04 (“Abbey National plc, Inscape Investment Fund vs. Commissioners of Custom & Excise”) ECLI:EU:C:2006:289.
[ix] Ruling of the ECJ, November 10th 2011, concerning Cases C-259/10 and C-260/10 (“Commissioners for HMRC vs. The Rank Group plc”) ECLI:EU:C:2011:719.