Initial Coin Offering (ICO), also referred to as Token Generating Event (TGE), is a new and, until now, loosely regulated form of crowdfunding, which is mainly used by companies whose business model is based on the blockchain technology. In the centre of this new form of financing is Switzerland; in particular the so-called Crypto Valley Zug. In addition to regulatory challenges, aiming to limit the risk of fraud, a TGE also leads to new tax related questions.
During a Token Generating Event (hereafter TGE") startups and established companies issue cryptocurrencies (hereafter Tokens") which are based on the blockchain technology. The raised proceeds will be used by the company to fund the announced project. In contrast to collective debt raising, an initial public offering, or the increase of the company's equity, raising funds in the form of a TGE is hardly regulated. In addition, a TGE can be structured in such way that the investors are not entitled to ownership, profits, or participation rights. In the cases of the TGEs we consulted, even the effective use of the funds raised for the announced projects was contractually waived. Hence, the only obligation of the issuer is to deliver the token.
The function and features of the issued token highly depend on the nature of the project. Given that the funds raised during the TGE are required to finance the project, the virtual currency does not have an intrinsic value at the time of issuance. Only when the project (in most cases a software application such as a platform) has been successfully completed, the token becomes usable. Depending on the number of tokens purchased, the subscribers are entitled to use the developed service. Speculative investors, who have no interest in the end-product, wager that the project will be a great success. In such cases, the demand for the tokens will grow strongly, leading to capital gains for the investors. Of course, participating in a TGE can be lucrative not only for speculators, but also for the future users of the developed solution since they can pre-order the services at a lower price than what would need to be paid in the future.
Until now there is neither prevailing legal practice nor administrative guidelines on the tax treatment of TGEs. Therefore, this article aims to be an attempt to situate this new form of financing into the existing Swiss legal system. In many cases a company disposes over its own inventory of cryptocurrencies after the TGE. The potential tax consequences arising from holding tokens after the TGE are presented in the second part of the article. Financial regulatory aspects - which are very important when conducting a TGE - are not subject of discussion in this article.
Corporate law structuring
The first step for founders considering a TGE is to determine the legal form of the issuing entity. This decision depends on the particular case and affects significantly not only the taxation at the time of the TGE but also the tax consequences in the following periods. When making this decision, also corporate law aspects must be considered carefully. Numerous TGEs in Switzerland are carried out by a foundation (Stiftung) as the issuer of the tokens. However, it is also possible - and in particular from a longterm perspective more practical - to use a corporation as the issuer of the tokens.
2.1 Foundation as issuer of the tokens
Using a foundation to carry out the issuance of a cryptocurrency is not primarily driven by particular tax or regulatory motives. It shall rather increase the investors' trust in the project and the issued currency (Good Governance). This because the use of the foundation's assets in conformity with the foundations statutory purpose is monitored by the supervisory authority. The supervision ensures that not only the financial interests of the initiators of the project are in the foreground, but those of the project itself. This helps to foster trust in the project and ultimately increase the value of the issued currency and procure additional funds.
The disadvantage of a foundation is that the dedicated assets (consisting of the funds raised during the TGE and all later receipts) may be used only in the context of the notarised purpose of the foundation. If the objectives of the foundation change or if new projects are intended to be launched, a time-consuming revision of the deed of foundation is necessary to adjust the foundation's purpose. It is therefore important to carefully define the foundation's purpose in advance of the TGE.
If a foundation conducts the TGE, an operating company owned by the project initiators is usually responsible for the operational realization of the project. This operating company employs the programmers and technicians. For the realization of the project a service agreement is concluded between the two companies. The scope of the service agreement must be consistent with the foundation's statutory purpose.
2.2 Corporation as issuer of the tokens
A corporation as an issuer has several...