THE BOTTOM LINE
- VAT Deductions Hinge on Your Direct Customer: A Dutch crypto platform was denied an input VAT deduction because its back-to-back trades with a non-EU exchange did not constitute providing a service to a non-EU customer. The court ruled the platform was a customer of the exchange, not a provider.
- Follow the Fees to Identify the Service: The court’s decision was based on a simple principle: who pays whom? Since the platform paid fees to the US-based exchange for its services, a customer-supplier relationship was established in that direction only.
- Structuring International Transactions is Critical for VAT: For companies providing VAT-exempt financial services, this ruling is a stark reminder. To claim input VAT deductions based on serving non-EU clients, you must prove a direct service-for-payment relationship with those non-EU entities. Intermediary or hedging transactions do not automatically qualify.
THE DETAILS
A Dutch company operating a digital cryptocurrency trading platform recently lost a significant tax case concerning the deductibility of Value Added Tax (VAT). The company’s business model involved two steps: first, facilitating crypto-to-fiat exchanges for its EU-based customers for a fee; second, immediately executing an opposing back-to-back trade on a US-based exchange (Bittrex) to hedge its position. The company argued that this second step constituted a service provided to a customer outside the EU, which, under Dutch law, would entitle it to deduct the input VAT it had incurred on its business costs.
The District Court of The Hague disagreed, focusing on the fundamental nature of the relationship between the Dutch platform and the US exchange. The court’s analysis was clear and commercially grounded: it examined the contractual terms and the flow of payments. The evidence showed that the Dutch company paid service fees to the US exchange for the privilege of using its trading facilities. There was no corresponding payment or fee flowing from the US exchange to the Dutch company. Therefore, the court concluded that the Dutch platform was simply a customer of the US exchange, not a service provider to it.
In its reasoning, the court dismissed the company’s attempt to draw a parallel with a key European Court of Justice ruling on foreign exchange transactions (the First National Bank of Chicago case). The court distinguished that precedent by highlighting that, in this case, there were explicit service fees being paid by the platform to the exchange. This created two distinct and separate services for VAT purposes: one provided by the Dutch platform to its EU customers, and another provided by the US exchange to the Dutch platform. Because the company’s only true service recipients were within the EU, the legal grounds for deducting input VAT were not met. The tax authority’s assessments were therefore upheld.
SOURCE
Source: Rechtbank Den Haag
