Many FinTech companies in Europe (and other places with VAT equivalent) are asking me if it’s correct to assume that crypto and FinTech businesses are generally VAT exempt. 

Almost – with one big exemption. It is very common for many FinTech companies to have hybrid business models where you charge your customers some fees that are VAT exempt (e.g. transactional fees, withdrawal fees, FX fees), but there are also some payments and fees that are potentially subject to VAT because they may be related to non-regulated products and services (e.g. marketing rewards, depending on how they are structured, coin listing fees, annual membership fees, prizes for technical bug bounty services, fees for technical support (e.g. for API integration or code reviews or for technical wallet management). Depending on what is covered by the service or included in the membership and how the rewards are allocated and monetized, it is possible that some of these payments are actually subject to VAT. So, be careful. 🧐

It is not uncommon to see regulatory requests for cryptocurrency-focused businesses to split their activities into 2 parts: regulated and non-regulated, and part of the reason is also VAT related.

For example, the licensed (e.g. regulated) entity may be dedicated to operations with fiat funds and fiat deposits, and the non-regulated entity would be facilitating transactions with cryptocurrencies or managing cryptocurrency wallets. Alternatively, it’s possible that the regulated side of the business will be focused exclusively on financial services and the non-regulated side would be offering technical, marketing, and other support services.

If this question is relevant to your business – here are a few issues to consider:

• Think about which services will be subject to VAT (e.g. revenues from offering technical or marketing services) and exempt from VAT (transactional or foreign exchange fees) and what will be the VAT impact on pricing for your customers. It often makes sense to split activities across VAT lines, if possible and applicable.
• How you are going to share the data, people, and processes across both entities? If both entities will share customers and need to have the same people and the same tools and will work towards the same deadlines and targets, it could be potentially a very good reason not to split.
• Will both entities have a direct relationship with the customer and collect their respective fees and revenues directly – or will you make one entity an internal cost center and another one a customer-facing revenue center?
• Are your entities going to be a parent and a subsidiary or do they need to stay independent?

There are no particular right or wrong answers, and many business models are very unique but hopefully, these questions could help you frame your internal discussions.

Have a great day! 🤞🏻