Whether you are the owner of an existing business or plan to start using digital assets to make transactions, investments, or other purposes, it is crucial to understand the tax implications of such business ventures.
Since we already wrote about the taxation of digital assets for natural persons, this blog will focus on relevant taxation issues for crypto owners who are legal entities. Considering that there is less information available about crypto tax regulation when it comes to legal entities, the goal of this blog is to provide perspective and answers to some of the relevant questions of crypto taxation of relevance for legal entities.
It is already widely known that Serbia has adopted a comprehensive legislative framework for digital assets. Alongside the implementation of the Law on Digital Assets on December 30th, 2020, the tax regulation that governs crypto also began to apply.
The Law on Digital Assets implies two categories under digital assets – virtual currencies and digital tokens. Virtual currencies are best described as digital assets with a certain value that can be used for exchange purposes but is not considered money or legal tender. On the other hand, Digital tokens are digital records that contain one or more monetary rights. In addition, there is also a hybrid digital asset that incorporates the features of both mentioned types. You can read more about the similarities and differences between virtual currencies and digital tokens in our previous blogs on the topic of crypto.
Yes, legal entities can acquire and use digital assets.
Just as individuals pay income tax, legal entities also pay the tax on the profit they generate annually. The total taxable amount of a legal entity’s profit is determined by making accounting adjustments to the profit on the profit and loss statement. The profit and loss statement is a financial report that companies are required to prepare annually and which contains revenues and expenses from the business activities of the Company during the fiscal year. The difference between the revenues and expenses determined in a such way represents the profit of the Company, which is subject to taxation at a tax rate of 15%.
In addition to the fact that the corporate income tax rate in Serbia is lower than in many other popular investment destinations, many other benefits and tax incentives make Serbia an ideal destination for relocating or starting a business.
The key to establishing the exact amount of tax liability for digital assets is to determine two values: the acquiring price and the selling price of a certain digital asset. Below we will explain why these two values are important and ways to determine them.
Now that companies pay tax on the total profit they make during the business year, the question arises, how do digital assets fit into all this, given their extreme price volatility? For example, it could happen that at one moment the value of one Bitcoin amounts to USD 68,000.00, while in the next month, it could suddenly drop to USD 26,000.00. This can be problematic given that it is impossible to reliably book the value of a digital asset that may differ at the end of the business year compared to the moment it was acquired. Therefore, the legislator decided to tax digital assets with a capital gains tax, which resolved the described uncertainty.
Put simply, a capital gain is considered a difference between the selling price of the digital asset and the price at which the digital asset was acquired. Thus, if there is a positive difference between those values a capital gain was realized. If, on the other hand, that difference is negative, the company suffered a capital loss.
For example, if a Company bought one BTC for USD 30,000.00 (acquiring price) and later sold it for USD 50,000.00 (selling price), the positive difference in these two values of USD 20,000.00 represents the capital gain. The capital gain obtained in this way is then recorded in the business books of the company as income and is included in the total sum of all other recorded incomes. The case is the same for capital losses. Namely, in case the difference between said prices is negative, the capital loss will be booked as an expense, which will ultimately reduce the taxable profit of the Company. The described mechanism is the fundamental way legal entities pay tax on crypto i.e., digital assets when it comes to corporate income tax.
It is important to keep in mind that the aforementioned determining of capital gains and losses applies to “unaffiliated” legal entities, while it will be applied to affiliated legal entities only if the selling price of crypto is equal to or higher than the market price. Otherwise, if the price agreed between affiliated companies is lower than the market price, the capital gain or loss will be determined based on the market prices.
What would happen if a legal entity wanted to convert BTC to ETH? Regardless of the mechanism, i.e. if the conversion to another cryptocurrency is done through a digital assets service provider, or if a legal entity wants to exchange its digital asset for another right or digital asset, such transaction may still fall under capital gains tax treatment. How does this happen?
To clarify all unknowns, we need to start explaining from the very beginning.
Namely, there are three basic ways digital assets can be acquired:
- Acquisition from another person (for example by purchase or barter),
- By issuing crypto (which we already discussed in our blog on cryptocurrency licenses in Serbia).
In the first case, the matter is clear. Selling price minus purchasing price equals capital gains.
However, if a company acquired a certain crypto asset through the mining process, and later sold it at a certain price, the question that arises is how to determine the exact acquiring price. The purchase price of crypto, in case of its acquisition through mining, corresponds to the acquisition expenses specified in the business books of the Company, following the accounting standards. It can be argued that such acquisition expenses could represent, for example, the purchase price of the mining equipment, bills for consumed electricity, and the like. Detailed instructions are yet to be issued by the Tax Authority in the future. Therefore, in the case where the acquiring value is determinable from the business books, and the digital assets are sold for FIAT currency, the situation is much clearer since both relevant values for determining the capital gains are known.
The next question that arises is what constitutes the selling price in the case of an exchange of a digital asset for another digital asset (SWAP) or other monetary rights. According to Law, in the case of a rights exchange, the selling price is considered the market price of the right that is being received from such an exchange. This effectively means that the selling price of the digital asset we wish to trade off is equal to the market price of the digital asset or monetary right we receive in exchange.
Thus, if the acquiring price of one BTC was USD 5,000.00, and one year later we wish to exchange that same BTC for 20 ETH, the selling price of our Bitcoin will be the same as the market value of 20 ETHs at the time of executing that exchange. Therefore, if at the time of the exchange, 20 ETH is worth a total of USD 60,000.00, that exact amount will represent the selling value of one BTC that we give in exchange. In other words, the capital gain realized in this case amounts to the difference between the market value of the ETHs we receive in exchange and the value of one BTC at the time of its acquisition, which in this case would amount to USD 55,000.00.
Legal entities that have the permission of the regulatory authority to provide services related to digital assets are exempt from the aforementioned obligation to calculate and pay capital gains tax. More accurately, crypto service providers are exempt from paying capital gains tax if they have acquired digital assets solely to resell them as part of the services related to digital assets they provide. For example, if the service provider receives digital assets to execute its clients’ orders consisting of the sale or transfer of these digital assets to third parties, then there is no place for capital gains taxation because these crypto are received solely to resell them as part of the services related to digital assets.
Ultimately, it is crucial to document the acquiring and selling price of cryptocurrencies and digital tokens, since these values must be determinable in each transaction, even in the case of mining and swapping.
A company’s share capital can be monetary (consisting of the FIAT currency) and non-monetary (for example, IP rights or Real Estate). One of the often-raised questions in practice is whether digital assets can be included in the company’s founding capital and what type of capital would it represent. The answer to this question is provided by the Law on Digital Assets. Namely, the Law foresees the possibility of introducing digital tokens into the founding capital of the company in a form of non-monetary capital. Virtual currencies such as Bitcoin, however, cannot be directly included in the founding capital but could always be converted into FIAT and paid in as Company’s monetary capital.
What is the reason for excluding cryptocurrencies from the possibility of their direct depositing as non-monetary capital? The answer lies in the cryptocurrencies’ value volatility. Namely, if non-monetary capital is to be brought into a certain company, it would be necessary to register such change before the Business Registers Agency. The fundamental requirement for such registration is to define the monetary value of such a non-monetary contribution, which is also subject to registration. Therefore, determining the monetary value of the virtual currency would be very difficult, given that the value of this crypto asset changes very quickly.
The question that consequently arises is – why this possibility is even left for digital tokens, given that their value can also fluctuate. The law stipulates that it is not allowed to invest digital tokens related to the provision of services or work into the non-monetary capital of the company. Therefore, it is allowed to invest a certain token in the capital of a Company that gives its owner a certain claim or some other right. The background logic behind this is that if the token is linked to an appropriate right, the value of that exact right would essentially represent the monetary value of the token that is registered as non-monetary capital of the Company.
In addition to this, the Law stipulates an additional condition that only those tokens that have been published on the list of the Securities Commission can be entered into the Company’s non-monetary capital. In this way, the Legislator tried to establish double protection against the volatility of digital tokens.
Due to its great popularity in previous years, a large amount of money has been accumulated in the crypto market. Some data say that at the beginning of 2023, the total value of all crypto assets was over 800 billion US dollars. This means that there is plenty of room for such accumulated capital to flow into the traditional markets. Serbian crypto regulation has therefore introduced favorable tax treatment and incentives for channeling the crypto capital into business ventures.
When it comes to legal entities, the Law prescribed the possibility of deducting capital gains realized from the sale of digital assets from the tax base, provided that these funds are invested in the share capital of a Company or an investment fund in Serbia.
For example, if a company decides to sell digital assets it owns, using this tax incentive would lead to the effect as if capital gain never happened. This way, the company that sold digital assets would reduce its total taxable profit, and on the other hand would create means of funding, say, the establishment of its daughter company.
The Legislator has also prescribed tax reliefs for natural persons who wish to incorporate legal entities by using crypto capital. In such a case, it is possible to reduce the tax on capital gains owed by natural persons. In short, a natural person who invests the money obtained from the sale of digital assets in the company’s share capital in the Republic of Serbia is granted a tax exemption in the amount of 50% of the owed capital gains tax.
These two incentives are designed to make it easier for companies and individuals to invest their crypto capital into business ventures, which could indeed open many business possibilities for crypto owners and enthusiasts.
Before the introduction of the formal tax regulation for digital assets, there was a dilemma in Europe, and therefore in Serbia as well, about whether there was an obligation to pay value-added tax for digital assets for VAT taxpayers. This dilemma was first resolved in Serbia in 2017 with the stance taken by the Ministry of Finance in its official opinion. At that time, the Ministry took a peculiar position that the turnover of cryptocurrencies is subject to VAT. Due to the absence of a clear legal framework, the legal system at that time did not recognize the different types of digital assets (virtual currencies and digital tokens) as there is today.
Today, however, contrary to the earlier opinion of the Ministry of Finance the amendments to the Law on the value-added tax introduced a tax exemption for the transfer of virtual currencies and the exchange of virtual currencies for FIAT currency, without the right to deduct the input VAT. This essentially means that the entity selling virtual currencies is not obliged to calculate and pay the VAT.
The reason why virtual currencies are exempt from VAT lies in the fact that in tax matters, the facts are determined according to their economic essence. What does this exactly mean? This means that it is necessary to observe the economic essence of facts and not the form in which a certain transaction was made. For certain transactions to be taxed with VAT, they would inter alia have to refer to the sale of goods or provision of services in the Republic of Serbia. Thus, it seems that it was the view of the law drafters that the exchange of virtual currencies for FIAT does not essentially imply the turnover of goods and services.
On the other hand, digital tokens usually refer to specific services or goods. Hence the legislator resorted to a solution according to which the turnover of digital tokens is taxed with VAT.
Nevertheless, the question of hybrid digital assets (crypto with the attributes of both types of digital assets) can be raised again at this point, which makes the question of how to interpret the economic essence of those digital tokens.
If a digital token incorporates a certain good or service, in addition to all other properties such token may contain, it can be argued that such token would not be exempt from the VAT. Likewise, if the token does not guarantee any good or service, such a token could potentially be treated as a virtual currency, leading to a tax exemption. Digital tokens may also possess other specific properties, which could also lead them to VAT exemptions. Hence, it is advisable to always assess the attributes and legal nature of digital assets when it comes to their sale.