Malta Emerges as World’s Cryptocurrency Hub Despite EU’s TAX3 Investigation: Expert Take

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On June 7, European Union’s Special Committee on Financial Crimes, Tax Evasion and Tax Avoidance (TAX3) members participated in a workshop on "Taxation and fight against Money Laundering: Crypto Currencies, Digitalization and the European Semester."   

At the workshop Professor Robby Houben presented the legal context of virtual currencies and blockchain and mapped the implications for financial crime, money laundering and tax evasion, including against the backdrop of the newly adopted EU Anti-money laundering legislation.   

He explained that newer and proposed cryptocurrency implementations such as Cloakcoin, Dash, PIVX and Zcoin have built in mixing services as a part of their blockchain network. The Monero cryptocurrency provides anonymity without tumbling services due to its privacy centric design, utilizing ring signatures to keep the entire blockchain secure and untraceable. He pointed to the need for adopting crypto regulations at an EU and maybe even at a G-20 level to have mixing services recognized as money-laundering and tax evasion indicators, with users of mixing services assumed to be guilty of these offenses.

The power to levy taxes, including cryptocurrency taxes, is central to the sovereignty of EU Member States, which have assigned only limited competences to the EU in this area.  The EU lacks a uniform tax regulator. Therefore, aggressive tax planning by multinational crypto-businesses is monitored by the EU Anti-Trust Commission which is in charge of policing state aid that skews competition within the EU.  Ricardo Cardoso spokesperson handling Commissioner Margrethe Vestager’s portfolio said:

“The Commission has no ongoing investigations concerning cryptocurrency related issues and we would never speculate on such matters.”

Accordingly, TAX3 was established by the European Parliament on March 1, 2018 in response to continued revelations over the last five years via LuxLeaks, the Panama Papers and the Paradise Papers which shed light on the rampant tax evasion, money laundering and corruption at EU Member States, that have independent citizenship programs, tax and policies. As Dariusz Rosati MEP, EPP Group Spokesman in the Special Committee on Financial Crimes, Tax Evasion and Tax Avoidance, said:

“For me, selling EU citizenship does not only mean enabling the rich to free-ride on our common European assets. It also allows the rich to escape sanctions or launder money. Take the example of Malta which uses citizenship in exchange for investments program to attract investments, where rich Russian citizens - who potentially could be targeted by further sanctions - are amongst the nationalities that most frequently receive Maltese - therefore European - citizenship.”

TAX3’s mission is to:

• Contribute to the ongoing debate on taxation of the digital economy, including VAT;
• Assess national schemes providing tax privileges (such as sale of citizenship programs);
• Follow closely the ongoing work of, and contribution by, the Commission and Member States in international institutions, including the Organization for Economic Co-operation and Development (OECD), G20, UN and the Financial Action Task Force (FATF) regarding taxation/cryptocurrency matters.

The TAX3 Committee has a twelve-month mandate. At the end of this period, it will submit a report with findings and recommendations to do more to fight tax crimes, tax evasion and tax avoidance in EU to set the stage for fairness in tax competition with many EU Member States.  

“Investigations –like TAX3--could lead to a lasting split in cryptocurrency markets, as exchanges face the choice of whether to comply with mounting regulatory demands” cautioned Cornell professor and computer scientist Emin Gun Sirer who is the co-founder of a peer-to-peer virtual currency system called Karma, which pre-dates Bitcoin by seven years.  “Exchanges will go one of two ways,” Sirer said. “Either they will clean their act, by first shopping for the most lenient jurisdictions with relevant KYC/AML and tax laws or they'll go ‘fully underground,’ and operate with no rules, behind Tor and other anonymous communication technologies” with mixing capabilities to evade KYC/AML and tax laws.

Indeed, many exchanges from Asia and EU after shopping around for the most tax and regulatory lenient crypto jurisdiction have set up shop in Malta.  As a result, according to a study conducted by Morgan Stanley, Malta now accounts for the largest share of cryptocurrency trading volume in the world.

Malta is a global trailblazer in crypto blockchain and ICO regulation

Malta's Prime Minister Joseph Muscat has described his country as the global trailblazer in the regulation of blockchain-based businesses and the jurisdiction of quality and choice for world class fintech companies.  Muscat ties Malta’s success to becoming a member of EU’s Blockchain Partnership; it’s three new cryptocurrency bills  adopted by parliament on April 24; as well as it’s favorable crypto tax policy.

The bills grant regulatory power to the Malta Financial Services Authority  to publish and enforce specific rules regarding cryptocurrencies.

Malta Digital Innovation Authority Bill. It establishes the Malta Digital Innovation Authority, which on a voluntary basis, will certify blockchain platforms to ensure credibility and provide legal assurances regarding cryptocurrencies.

Innovative Technology Arrangements Bill. It provides a framework for the registration of technology service providers and the certification of technology arrangements concerning system administrators and auditors.

Services and Virtual Financial Asset Bill. It provides the regulatory framework for cryptocurrencies and initial coin offerings (ICOs).

Cryptocurrencies are currently unregulated under Maltese law and exchanges of cryptocurrencies are deemed equivalent to commodity trading. A company utilizing  cryptocurrencies isn't required to obtain a license from the Malta Financial Services Authority unless it qualifies as a collective investment scheme or carries on the business of a financial institution or payment service provider, in which case the company would need to be appropriately licensed under the Financial Institutions Act.

Further, cryptocurrencies aren't considered investment instruments under the Investment Services Act and don't trigger any licensing requirements under the act.

Cryptocurrency taxation

In explaining Malta’s tax policy, three MEPs, David Casa, Roberta Metsola and Francis Zammit Dimech said “We will never allow the EU to decide on behalf of the Maltese people on how to run our tax systems. That was, still is, and must remain, the competence of the respective governments.”   

“Maltese has no tax legislation regulating cryptocurrencies as a medium of exchange. Only if the sale of cryptocurrency is done on a habitual basis and/or the length of ownership is very short, the consideration of the sale may be considered as being income and therefore subject to income tax at 5 percent” said Dr. Mariella Baldacchino B.A, LL.D of E&S Consultancy.

Furthermore, “The Maltese Value Added Tax (VAT) Department follows the European Court of Justice judgment in Hedqvist (C-264/14).   Therefore, transactions to exchange fiat currencies for units of cryptocurrency and vice versa are exempt from VAT as well” added Baldacchino.

Nevertheless, the US customers/investors of Maltese crypto-exchanges/crypto-funds should keep in mind their US tax obligations, including Foreign Account Tax Compliance Act (FATCA) and Report of Foreign Bank and Financial Accounts (FBAR) tax reporting requirements as reiterated by the AICPA in its second letter to the IRS.