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Czech Digital Tax Proposal | Digital Currency Tax Lawyer & Attorney

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The Czech Republic just joined an ever increasing list of countries who are introducing their own versions of the digital tax. Let’s explore this development in more detail.

Czech Digital Tax Proposal: Overview

The Czech Republic’s ministry of finance just announced that it will introduce by the end of May of this year a 7% digital tax. The exact details are not yet know, but it appears that the tax will affect mostly the large multinational companies – those that make at least 750 million euros in global revenue.

Czech Digital Tax Proposal: When the New Tax Will Become Effective

If passed into law (and this appears to be the case), the new tax will take effect on January 1, 2020.

Czech Digital Tax Proposal: Reasons for the New Tax

There are four reasons for the introduction of the new digital tax. The first and most obvious one is raising additional revenue. The Czech finance minister is hoping to raise at least 5 billion Czech koruna (or $22 million) on an annual basis.

The second reason for the Czech digital tax is the fact that the Czech government is reacting to developments (or lack thereof) in this area of international tax law. Despite this being an issue for some time now, the European Union (“EU”) and the Organization for Economic Cooperation and Development (“OECD”) have both failed to work out an international framework for digital taxation.

As Sherayzen Law Office has written previously, the EU discussion on the single digital tax is now completely stalled. There is a stubborn opposition to the existing proposals from many member states, particularly Ireland and Sweden.

Similarly, the OECD efforts to find a global consensus on the issue of taxation of the digital economy are progressing at a snail’s pace. In fact, there is no certainty whether the OECD will finalize this discussion any time soon.

The failure to reach an agreement at a supra-national level has already led some of the largest EU economies to adopt their own version of the digital tax. The recent examples include France, Italy, Spain and the United Kingdom. The Czech Republic does not want to be the last country to adopt a national digital tax and there is no hope for an immediate resolution at the EU level.

This leads us to the third reason for the current Czech legal action. The Czech government is sending a message to the EU to come up with a long-sought digital tax that would apply uniformly across the EU countries. Otherwise, the EU will not be able to act as an economic union with respect to the digital economy.

Finally, the fourth and related reason for the new Czech digital tax is the fact that the Czech government wants to position itself better for the EU negotiations on the taxation of the digital economy. Right now, the EU countries that are preparing to adopt a digital tax are in a better position to negotiate the final consensus that would be more beneficial to them vis-a-vis the EU countries which do not have anything in place.

It is not just a matter of better experience and more insight into the impact of a digital tax. The real issue is going to be the cost of tax harmonization. Since the EU countries without a national digital tax do not have any, the EU countries with a national digital tax will be able to argue that, in order to be fair, the final proposal needs to be closer to their national tax systems in order to reduce the tax harmonization costs.

In fact, the more countries that announce their own versions of a digital tax, the more pressure the rest of the EU states will feel to do the same in order to preserve their negotiation position.

Bitcoin is Property Under Israeli Tax Law | Cryptocurrency Tax Lawyer

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On February 19, 2018, the Israel Tax Authority (“ITA”) stated in a circular to tax professionals that cryptocurrencies, such as Bitcoin, are property under Israeli tax law. This view brings the Israeli tax law very much in line with the IRS position in the United States.

Cryptocurrency is Property under Israeli Tax Law and Subject to Israeli Taxation

After years of vacillation, the ITA took the hard stance and stated that virtual currencies should be treated as intangible assets. This is a position very similar to the IRS in the United States, which declared in March of 2014 that it will consider and tax cryptocurrencies as property.

The ITA position leads to the logical conclusion that any income generated by these assets (including from the sale of cryptocurrencies) will be subject to Israeli taxation. The exact level of taxation will depend on whether a taxpayer is engaged in a business activity.

Cryptocurrency as a Non-Business Property under Israeli Tax Law

If a taxpayer’s activities do not rise to the level where a taxpayer would be considered as carrying on a business, he will not be subject to the Value Added Tax (“VAT”). This individual, however, will still have to pay the Capital Gains Tax (“CGT”) on any gains from the sale of bitcoins and other cryptocurrencies. The current CGT rate in Israel for individuals is 25%.

On the other hand, it appears that capital losses incurred by investors in crytocurrencies (a topic of special relevance today in light of the recent huge drop in the value of Bitcoins) can be used to offset any capital gains. Furthermore, these losses can be carried forward to future tax years.

Cryptocurrency as a Business Property under Israeli Tax Law

It gets a lot worse for businesses. First of all, the “mining” of virtual currencies (this is process of solving algorithms to create a new unit of a virtual currency) will be generally subject to 17% VAT. The VAT is imposed only on the mining itself; it appears that the trades thereafter will not be subject to VAT.

Second, any taxpayer engaged in the business of trading virtual currencies will be classified as a financial institution for the VAT purposes.

Finally, businesses that conduct transactions with virtual currencies should report them on their business tax returns. Any capital gains generated by cryptocurrencies will generally require businesses to pay the CGT up to the maximum rate of 47%.

ITA Circular on Cryptocurrencies as Property Under Israeli Tax Law Can Be Challenged in Court

It should be kept in mind that the circular issued by the ITA represents only the ITA’s position on cryptocurrencies as property under Israeli tax law. This circular is not the final law and it can be challenged in courts.

Contact Sherayzen Law Office for Help with US Tax Planning and Tax Compliance Concerning Ownership of Cryptocurrencies

If you are a US taxpayer who owns or deals with cryptocurrencies, you may have a significant exposure to US taxation.   If you would like to find out more about US taxation of cryptocurrencies, contact Sherayzen Law Office to schedule a confidential consultation.