Lithuania becomes the latest jurisdiction to release guidance in relation to ICOs.
On 8 June 2018, the Lithuanian Government released new Guidelines to deal with what it referred to as an “explosion of ICOs” in the country. Lithuania heralds itself as a leader in FinTech and has published the ICO Guidelines as a step towards more “certainty and transparency in the regulatory, taxation [and] accounting” requirements of ICOs, and also, importantly, to encourage the crypto sector to bring their business to Lithuania.
In his forward to the Guidelines, the Lithuanian Minister of Finance Vilius Šapoka acknowledges: “that the brave new crypto economy world is here to stay, this is why we encourage and invite its participants to innovate and create in Lithuania.”
Although not legally binding, the Guidelines are a clear indication of the approach Lithuania will take towards ICOs. The Guidelines are split into four parts: Regulatory; Taxation; Accounting; and AML / Counter Terrorist Financing.
Like many other jurisdictions, there is no existing regulation in Lithuania that regulates initial coin offerings. However, where entities are planning to provide regulated financial services or conduct ICOs that release tokens that constitute securities, these activities will be subject to the scrutiny of the regulator, the Bank of Lithuania.
The Guidelines make clear that a token is likely to be considered a security if the token “grants profits or governance rights“, and details certain rights that would be indicative of a security:
- a right to participate in the company’s management process;
- a right to receive part of the company’s profit;
- a right to receive part of the company’s income;
- a right to receive interest for invested funds;
- a right to recover invested funds; and/or
- a right to receive additional income through redemption of the token.
Where the token does not grant profits or governance rights, e.g. it grants a right to use a product or service (a “utility token”), it will not be subject to securities laws, but the Lithuania Civil Code will apply. Where the token is used as a payment instrument, or as charitable donation, AML and CTF law will also apply.
The tax treatment of cryptoassets has been fairly inconsistent and in some cases unclear across many leading ICO jurisdictions. The Guidelines try to clarify the situation in Lithuania.
Corporate Income Tax: Funds collected through an ICO won’t be subject to corporate income tax when the tokens are security or utility tokens. Where tokens are neither security or utility tokens, but only confirm payment without granting rights, the funds collected will be recognised as income when the tokens are issued.
Personal Income Tax: The income received from individual purchases and sales of virtual currencies will be taxed at standard 15% fixed income tax rate.
Tokens designated to founders: Founders will not be taxed if the tokens are not active or locked or if they are held for dividend or interest payments to investors.
VAT: The release of tokens is not subject to VAT. Whether expenses related to an ICO can be deducted for the purposes of VAT depends on what activity will be launched. In terms of mining, mining itself is not subject to VAT and selling/exchanging mined virtual currency for fiat or other tokens is VAT-exempt. However, miners will be subject to VAT where they provide mining services to others for reward.
How cryptoassets are accounted for on a company’s books has received little attention from regulators to date. The Guidance from Lithuania tries to plug this gap.
Types of Token: If the token issuer will receive benefits from management of the platform after the ICO issue and any ICO expenses relate to such benefits, such expenses may be recognised as acquisition costs. All other expenses should be recorded as costs in the profits/loss statement. Tokens that remain in the crypto-wallet of the token issuer should be recorded in the off-balance account and recognised as units of a cryptocurrency accounted at fair value only after the active market of purchase /sale of tokens stabilises.
The accounting of value received in return for tokens issued will depend on the nature of the token. For payment tokens, the value is typically recognised as income. However, where the issuer will be liable to serve the platform free of charge going forward this should be recognised. For utility tokens, a company should typically recognise any variable liabilities. For security tokens, the financial liabilities should be recorded based on the appropriate accounting method and type for the nature of liabilities assumed.
After the acquisition of tokens, a company should record the tokens at acquisition cost and, during the subsequent evaluation, at fair value through profit and loss.
In terms of acquired tokens, accounting also depends on the token type. A token holder will typically treat payment tokens in the same way as cryptocurrency coins used for payment purposes. Before use, utility tokens should be recorded as payment tokens. After use, received benefits should be recorded based on the nature of the benefits and possibility of further use of the token. Where after use the utility token is annulled, the company user should record the difference between the value of services/products received and fair value of the utility token as profits/loss. With securities tokens, the token holder typically records additional benefits as a financial return or asset, depending on the nature of the benefit.
Intermediary: An undertaking performing intermediary services recognises the cryptocurrencies acquired for trading purposes as stocks at net realizable value. After sale, revenue and costs of sale are recorded.
Cryptocurrencies used as payment: Cryptocurrencies used as payment should be attributed to financial assets which is measured at fair value by presenting the change in fair value in the profits/loss statement. If any fees to intermediaries payable during acquisition of a cryptocurrency are deducted these should be included in the acquisition cost. All costs relating to mining should be recognised as expenses and mined cryptocurrency recorded at fair value by presenting difference in fair value as income in the profits/loss statement.
AML / Counter Terrorist Financing
The Guidance notes that the 5th AML Directive was adopted by Lithuania on 19 April 2018 and amendments to relevant national legislation are currently being prepared. It states that the first round of amendments will concentrate on provisions relevant to virtual currency exchanges and wallet services operators.