Crypto and business in the Netherlands
Oct 16, 2023
Crypto has been around for years now. It is a nifty invention that combines characteristics of information storage, equity and currency. For most people, crypto just means another asset they should be investing in like everybody else. But, over the years we have seen the development of a crypto that can actually be used for something other than just transferring value. This is what we call the “utility token” or “token”. A token can be a very handy tool if you want to build a company. In this article we will outline what this development can do for your business.
What is the difference between a token, a blockchain, a crypto, a share, and plain cash? What is the connection between them?
In order to launch a token you need to choose a blockchain to launch it on. The blockchain here takes the form of a big book that registers all information regarding the tokens. The main difference with a normal register is that a blockchain is “decentralized”. This means that equal copies of the register are stored at multiple places. These copies must all check out with each other, which means it is nigh impossible to defraud with the data stored in it. This makes it perfect to use as a trustworthy source of information. A blockchain is sometimes referred to as a “decentralized ledger”.
The word “crypto” refers to all tokens in the market. Crypto can be divided into security tokens and utility tokens. Security tokens only propose to store and transfer value, like Bitcoin or Tether. Utility tokens actually serve a purpose in a software ecosystem. An example: the Ethereum Foundation offers the use of its Ethereum blockchain. This allows users to record data decentrally on the Ethereum blockchain, with which that data is recorded immutably. With this technology, parties can issue their own token. Users pay Ethereum Network in Ether tokens (ETH) for the use of their blockchain. ETH is a utility token. For business purposes, “token” normally only means “utility token”. “Crypto” usually refers to the monetary side of tokens, for example when they are only used to invest or remunerate.
Normal companies, like the English Ltd. or the Dutch B.V., are divided into shares. These shares are held by the shareholders, and basically represent the full value of the company. The shares can be transferred to take an investor on board, or to completely transfer ownership to someone else. Tokens do not represent the value of the company, but the value given to it by the company that launched it. For example through the underlying software architecture.
The relationship between crypto and plain cash is complicated and simple at the same time. It is simple because there is usually an exchange rate and an exchange where you can transfer between the two. It is complex because the one is not necessarily a clear representation of the other. A crypto’s value is very much influenced by market sentiment, and the expectation of others jumping in or bailing out. In the current climate, the inflation of regular currencies by government printing plays a large role as well of course.
Why would you launch a token in the first place?
Anyone can launch a token. But a token as such has no value unless you give it one. This is where your business comes in. First you need to decide what your token represents, or what it is going to be used for. You can then set a price for it yourself, and find buyers for it. The underlying value of your technology and your proposition is most important here. A token can also be given the “right to use” something, like in the Ethereum example. A token can also be made into a representation of ownership of something else. This is what we call : tokenizing assets. A few examples:
A company can be tokenized, by making tokens represent the ownership rights to a share. In the Netherlands you can do this with certificates of shares, which are freely transferable without the intervention of a notary. You let a blockchain administer the circulation of your tokens (i.e. ownership). Here you have a clear connection between your token and the value of your company.
You can tokenize licenses or certificates of authenticity, for example relating to a limited series of artworks. Transferring the token actually transfers the ownership of the artwork.
You can split up one entire asset in parts, and tokenize those parts. For example, you can decide to split up one artwork in a fixed amount of pieces (say : 1,000) and issue tokens for each part. The artwork itself will (of course) remain unaltered but the ownership of it can be distributed over multiple parties.
Afterwards, you can decide to register your token on an exchange. At that point, the market will have a huge influence in valuing your token.
I see people buying tokens in projects that do not even exist yet. How do they do this
This actually happens a lot. Companies attract investors for their tokens, before the tokens actually exist. This is normally done in an agreement called a SAFT (Simple Agreement for Future Tokens). In this agreement, the company agrees to transfer the tokens once they come into existence. This way, you can attract the liquidity to start your project before you are able to launch the tokens.
Are there any regulations I need to be aware of before I start launching my token?
Yes there are. Not every jurisdiction is so kind towards issuing tokens and crypto in general, especially if your token is considered a security token. It may be wise to issue your token from another jurisdiction, because of more favourable legal or tax circumstances. But beware of the fact that just launching a token from jurisdiction A doesn’t necessarily keep you out of trouble from country B. For example, the SEC takes a very extra-territorial approach here. It is important to get a good legal opinion here.
In the Netherlands, utility tokens are usually not treated as securities and are exempt from any of the normal regulations you would have there under financial laws. That being said, it is wise to stick as closely as you can to them and keep a strict KYC policy in place. Always get a legal opinion about your specific situation.
How does remuneration in crypto work in the Netherlands?
Companies can give both employees and independent advisors remunerations in tokens. When you are an employee and you receive crypto - or a crypto associated benefit - you add its value to your total taxable income in your tax returns. The payment is considered “in natura”. For valuation you pick the moment on which you receive it. The employer needs to pay the regular security premiums over the payment of course.
When you are an independent advisor (i.e. “freelancer”), you can receive remuneration as well. You value the payments at the moment you receive them, and process them in your accounts as you would with normal payments. This means adding them to your total taxable income and paying income tax over them. Token payments require invoices and are also subject to regular VAT rules. Send an invoice for an X amount of tokens against X valuation, and add the VAT to that. If you invoice to a foreign company, chances are that you’re not subject to VAT.
I have bought or received crypto in private. How does taxation work in the Netherlands
Taking money out of the crypto sphere and taking it onto the real world involves taxation and explaining the origin of your funds.
1. You have bought crypto at one point in time, and sold it later at a profit.
The Netherlands does NOT have a capital gains tax on crypto investments. Instead, we have a very simple asset taxation system called Box 3. Each year when you fill out your income tax returns, you also declare your owned assets per 00:00 AM on January 1st of the year. This includes bank accounts, savings accounts, stock investments (representing under 5% of a company's capital) and crypto assets. The sum total of your Box 3 assets (including your crypto assets) gets taxed a flat fee of about 1-2 %. So profits from crypto as such are not taxed, but considered part of the taxed percentage. In order to prevent discussion about this later, document these investments. For example you can use screenshots of your wallets.
You have received airdrops / lock-ups in crypto or you receive a considerable amount of your income from crypto trading.
This may seem like a situation mentioned under 1. but in fact the tax authorities may consider this income. This means you move from Box 3 to Box 1 and should pay income taxes like any other citizen would.
You have been allowed to buy crypto at a below-market price.
This too may seem like a situation mentioned above under 1. But in fact, you have been given a reward, and that must be taxed as income tax. This is called “lucratief belang”. The taxable amount is the difference between what you paid, and what any regular other market party would have paid for the same amount of crypto.
If you find yourself in situation 2 or 3, reach out to a tax advisor. Once you have your tax situation figured out, you need to transfer your crypto from your crypto wallet to your bank account.This means you need to pass KYC at a bank and open an account there. Once you start transferring the funds, be prepared to answer all the questions regarding the origin of your funds. For this, it is important to have your file up to date. Once you have your currency in your bank account, it may be wise to make some smart asset management decisions like setting up a savings BV.
If you have any further questions after this, don’t hesitate to reach out!