Accounting for crypto-assets and taxes for crypto-companies in Estonia: the definitive guide

Which are the regulations governing accounting for crypto-companies in Estonia? What’s the taxation applicable to them? Quite often, the experts who work in this field are requested to answer these questions. Are you wondering whether crypto-transactions are subject or not to VAT, or how to account for the crypto-assets your company holds, or which are the tax consequences of issuing, holding and trading tokens? In that case, you could find it interesting to read this article.  

Topics covered:

Tax residency vs Citizenship; Taxation of the Estonian companies in a nutshell; Estonian taxation of salaries; Estonian VAT: the key points; Taxation of expenses in Estonia; Accounting requirements: an overview; Accounting for crypto-companies; Holding, buying and selling a cryptocurrency; Mining; Selling or buying good and services for cryptocurrencies; Holding security tokens; Providing crypto-exchange or wallet services; Managing utility tokens; Managing intangible and asset-backed tokens; Cryptocurrencies and share capital.

Tax residency vs Citizenship

We all know that a private company limited by shares (Osaühing, or Oü, in Estonian) is a legal entity that is liable for the performance of its obligations, with all its assets. As a consequence, and to put it shortly, its shareholders are not personally responsible for the company’s liabilities. 

The residency of each shareholder may differ from the company’s residency. The Estonian company is, by law, tax resident in Estonia, with certain exceptions. Tax laws determine the tax residency of the shareholders. It can be also different from their citizenship (e.g., a Spanish citizen may be a German tax resident, and pay his/her personal taxes to the German tax offices). 

Taxation of the Estonian companies, in a nutshell

Estonia offers a fair and transparent tax system that provides one main significant benefit: Estonian companies pay corporate taxes only if and when they distribute dividends. The profits reinvested by the company to finance its business operations aren’t taxed. This makes the country the ideal place for growing business if compared to many other EU countries (if not all of them), where paying the corporation tax is an annual deadline. 

This topic is strictly connected to the so-called “double taxation” and “permanent establishment” notions, which would lead us away from the matter in hand and can’t be analysed further in this article. 

There are three requirements to be met if a company wants to pay out dividends:

1. The share capital must be paid in. The payment of the share capital is usually not necessary at the time of the incorporation. For crypto-companies, anyway, the share capital must be paid in full before the filing of the application for the Virtual Currency Service Provider license.
2. The company’s annual report must be submitted. Among other things, the annual report shows the previous year’s profit and determines the amount of dividends that can be paid out.
3. The dividends can be distributed from the previous year’s profit. In other words, to payout profit for the current year isn’t allowed under the Estonian law.

When dividends are paid, the regular corporate income tax on profit must be paid, in the measure of 20% of the gross amount.

The Estonian tax system also offers the option to benefit from a reduced corporate income tax, which is 14%, if the company has been operating for at least three years, and has paid out dividends during the second year. In this case:

• During the third year, ? of the amount paid during the second year; and
• During the fourth year, ? of the total amount paid during the second and third year

can be taxed at a reduced rate.

When a reduced rate is applied, the dividend is subject to a 7% withholding tax, that can be deducted from the shareholder’s personal income declaration.

Estonian taxation of salaries

As a rule, an Estonian company can pay its workforce in two different ways: regular salaries and board member’s fees. A regular salary is paid for work performed by an employee. The board member’s fee is paid as a remuneration for his/her administrative tasks to manage the company.

Concerning its employees, the regular tax rates on salaries paid to Estonian tax-residents are:

• 20% for personal income tax;
• 33% for social security tax;
• 1,6% for unemployment tax;
• 0,8% for the employer’s unemployment tax;
• 2% for the pension fund.

Estonian tax-resident employees can get a maximum of 500 EUR tax-free per month. Such an amount decreases, depending on the salary. An online tool is quite often used to have a quite reliable estimate of the total labour cost.

Suppose the employee isn’t an Estonian tax-resident and doesn’t work in Estonia. In that case, the taxes on the salaries must be paid in the country where the individual is a tax-resident.

When it comes to the taxation of the board member’s fees, different rules apply. The director’s fee paid by an Estonian company to a non-resident director is always subject to 20% personal income tax. Double taxation treaty agreements typically allocate the taxing rights to the country where the company is incorporated (and has its permanent establishment). 

Then, if the member of the board:

• Lives and is secured for social benefits in an EU Member State, Iceland, Liechtenstein, Norway or Switzerland, the company is exempt from pay 33% social tax in Estonia only if submits the relevant A1 certificate to the Estonian tax office;
• Lives and is insured for social security in Australia, Canada or Ukraine (and other countries which have reached an agreement on social security with the Government of Estonia), the company is exempt from pay 33% social tax in Estonia only if submits the relevant certificate demonstrating the member of the board’s social security coverage issued by his/her relevant local authorities;
• Lives in another country or isn’t covered by social security, the company must pay 33% social tax in Estonia on the fees paid to him/her.

Estonian VAT: the key points

The regular Estonian VAT rate is 20%. A few fields of business (books, medical equipment, hotel accommodation, …) are subject to a reduced 9% VAT rate.

The threshold of registering for a VAT number is 40.000 euros of taxable turnover per year. The turnover is calculated on the sales to Estonian and EU clients.

An Estonian company can also register for a VAT number voluntarily before the threshold is reached.

Estonian VAT-liable companies must file VAT returns every month, by the 20th day of the month following the taxable period.

Taxation of expenses in Estonia

As a rule, all justified business expenses that can be used for business purposes aren’t taxed. All the expenses must be documented. The expenses which lack documentary evidence are subject to a 20% tax (or must be balanced with the out-of-pocket balance, if any). 

A fringe benefits tax applies to all those expenses that are considered as a benefit, such as food, drinks and representation expenses, which are subject to income and social tax. 

A tax-free limit (EUR 32 + 2% from the payroll per month) applies to the representation costs. 

Finally, a daily allowance applies to business trips. The daily allowance is up to EUR 50 for the first 15 days of the trip and EUR 32 for the rest of the journey. 

Accounting requirements: an overview

Accounting for all business entities incorporated in Estonia is regulated by the Accounting Act, which is in accordance with the International Accounting Standards, or IAS.

The financial year lasts 12 months. At its end, all businesses are required to prepare an annual report, that consists of the annual accounts and the management report. The annual report must be filed with the Register of economic activities, as a rule within six months after the end of the financial year. 

Auditing is compulsory only in the cases established by law.

Almost all Estonian companies prepare their annual accounts either under the International Financial Reporting Standards (IFRS) or following the Estonian Accounting Standards (local GAAP). 

Accounting for crypto-companies

Crypto-businesses (and all the companies who engage in financial transactions using the blockchain) must adequately account for crypto-transactions. In this respect, the Estonian Accounting Standards Board released specific (and useful) guidelines.

To account for blockchain-based instruments starts with their classification. Shortly, crypto-assets can fall into one of the categories below:

1. Cryptocurrency. These are digital coins, based on the blockchain technology, whose mean of exchange is separate from central banks. Cryptocurrencies' value is based on demand and supply and can be a payment instrument only where the parties involved in the transaction accept them.
2. Utility tokens. These are tokens that grant their owners to access a specific product or service. Utility tokens don't give ownership rights over the company that issues them. Their value is based on demand and supply. Taking into account the obvious differences, utility tokens can be compared to gift cards or vouchers. 
3. Asset-backed tokens. These are tokens that grant its holder the ownership right of a physical asset (e.g., gold). Their value is based on the underlying asset's value.
4. Security tokens. These are tokenised digital tradable financial assets. The value of a security token depends on its issuer's success. The Securities Market Act applies to such tokens. 

Based on such a classification, an Estonian company would be able to determine how to record a digital asset, that can be therefore considered as an asset, liability, expense, earnings, etcetera.

It's important to note that it's the board's responsibility to provide adequate information about this topic so that the accountant can correctly categorise the instrument and the Estonian Tax and Customs Board can efficiently conduct tax audits. 

That's why it’s highly advised that the company adopts an Accounting policy from the beginning of its operations, also to guarantee homogeneous accounting treatment of digital assets.

Further, it's essential to bear in mind that crypto-assets must be accounted for in a fashion that:

• the reader of the annual accounts can understand their substance;
• the accounting policy reflects the recording rules of similar instruments in the company's accounting records;
• economic transactions must be accounted for based on their economic substance (even when the essence differs from the legal form of the operation).

Holding, buying and selling a cryptocurrency 

Under the Estonian Income Tax Act, a cryptocurrency is an asset. However, per the IFRS cryptos are not regarded as cash or currency. So, when cryptocurrencies are accounted for by an Estonian company, they are not recorded as money. 

If a company trades tokens, buys and holds them for a quick resale, cryptos should be recorded as stocks. However, suppose the company plans to keep them for an extended period (for example, to make an exchange gain). In that case, cryptocurrencies should be carried on the books at their fair market value and treated as financial assets.

The value of crypto-financial instruments should be recorded in euros, using the FIFO or weighted average method, at the exchange rate as of the balance sheet's date. Where the value of a crypto-asset is firstly calculated in USD and then converted into EUR, the USD/EUR exchange rate should be based on the European Central Bank's Euro foreign exchange reference rates.

Mining

Crypto-mining is the process where an actor (the "miner") receives a crypto-reward for completing blocks of verified transactions which are added to the blockchain. 

For tax purposes, earnings from crypto-mining are treated as investment earnings. The market price at the time of mining can be reckoned as the historical cost, which is then revalued at its fair value as of the balance sheet's date.

In Estonia, mining is a VAT-exempt activity. While its value is not included in taxable turnover totals, miners can't get a refund for VAT paid on expenses related to mining (e.g., electricity costs).

The VAT-exemption rule above doesn't apply if the company rents its data capacity for mining (instead of mining directly). In this case, the activity is treated as a service for VAT purposes, and the standard 20%-VAT rate applies to it. VAT on expenses can be deducted, of course.

Selling or buying good and services for cryptocurrencies

If a company buys or sells goods or services and pays (receives payments) in a cryptocurrency, the amount paid (received) is recorded in euros, at the exchange rate as of the transaction date. 

Crypto-assets gained from such transactions are recorded as financial assets, and not as cash or fiat currency.

For VAT purposes, these transactions don't differ from a fiat currency transaction. However, the cryptocurrency itself isn't subject to VAT.

Providing crypto-exchange or wallet services

Those companies who hold a Virtual Currency Service Provider license granted by the Estonian FIU gain profits that, with reference to the crypto-exchange and/or wallet services, aren’t subject to VAT. Of course, this translates into the impossibility of recovering the input VAT.

Holding security tokens

The company can account for the security tokens it holds either as assets or contingent assets. 

If the company's management estimates that there's a high chance that the security tokens will increase their value, then the digital assets can be recorded as an asset. Otherwise, security tokens should be treated as a contingent asset, meaning as an expense for accounting purposes at the time of purchase.

Managing utility tokens

As mentioned earlier, a utility token grants the holder the right to purchase a good or service. If in the management's estimation, the utility token fits the definition of an asset (in other words, a financial gain can likely be obtained by the holder) and the company intends to exercise the right connected with the token, it can be recorded as a tangible asset or a prepayment for stocks. 

The tax rate for utility tokens mirrors that of their promised good or service. So, if the underlying product or service is subject to a 20% VAT rate, the token issuer generates a turnover with a 20% rate when the "voucher" is issued. General VAT rules apply (so, for example, if the buyer is an EU-VAT payer, the VAT rate is 0%).

If the VAT rate of the underlying good or service can't be determined at the time of issuance (for example, if the goods or services can be taxed either at 20% or 9%), then the issuer generates a turnover when the token is redeemed.

Managing intangible and asset-backed tokens

Tokens that grant their holders a right on an underlying asset (e.g. licences or patents, raw materials, works of art, real estate, etcetera) should be accounted for at the value of their underlying asset. Tokens that grant a contractual right to receive money in the measure of the value of the underlying asset can be recorded as financial assets.

Cryptocurrencies and share capital

Under §136 of the Estonian Commercial Code, the company's "share capital shall be denominated in euros". Therefore, even if it would be an exciting and smart idea, a crypto company's share capital can't be denominated in cryptos. 

The payment of the share capital can be monetary or non-monetary. In most cases, the shareholders opt for a monetary contribution because the process is simple and clear—the shareholders transfer their portion of the share capital to the company's bank account. Then, a petition is filed with the Register of economic activities so that the term 'Asutatud sissemakset tegemata' ('Established without making a contribution') is cancelled from it.

Non-monetary contributions are a bit trickier but more versatile. They allow the shareholders to use assets owned by them, such as raw materials, equipment, real estate, and so on. 

Crypto-currencies may be used to pay the share capital. In this case, the shareholders transfer the ownership of cryptos from their wallets to the company's wallet. This is treated as any other non-monetary contributions. In this case, the Register of economic activities must be provided with at least two documents:

1. a screenshot of the exchange rate of the cryptos transferred to the company from a trusted and reputable crypto-exchange
2. a copy of the agreement for the transfer of the cryptocurrency to the company.

If the share capital is above EUR 25,000, the value of the contribution must be assessed by a chartered auditor, and his/her report submitted to the Registrar. 

If you have any questions about these topics or need help to pay your company's share capital in Bitcoins or altcoins, feel free to post your comment below, DM me or visit estoniancryptolicenses.ee.

This article should not be construed as a recommendation, endorsement, opinion or approval of any kind. It has been produced for information only and should not be relied on for legal purposes. Professional advice should always be sought before taking action based on the information provided.