NFT for companies: Business models and VAT treatment

Non-fungible tokens (NFTs) offer companies a wide range of opportunities for new business models and sources of income. These digital assets have the potential to fundamentally change the way digital and physical goods are handled. At the same time, NFTs present companies with complex VAT challenges.

We look at possible business models opened up by NFTs and then address the challenges that arise when it comes to NFTs and VAT.

Possible uses of NFTs in companies

The digital assets based on blockchain technology represent unique, non-exchangeable units. In contrast to cryptocurrencies such as Bitcoin or Ethereum, each NFT has a unique identity and a specific value.

NFTs can represent the following, for example:

• digital artworks
• music
• videos
• virtual real estate

Companies can use NFTs in many different ways to expand their business strategies and tap into new sources of revenue.

Some examples:

Digital art and collectibles: Businesses can create and sell unique digital artwork or collectibles in the form of NFTs. This offers artists and creatives a new way to monetize their work while providing buyers with proof of ownership and certificates of authenticity.

Marketing and brand loyalty: Companies can use NFTs as part of their marketing strategy to offer exclusive content or experiences. For example, limited edition NFTs can be used as a reward for loyal customers or as part of promotional campaigns.

Virtual real estate and experiences: In the Metaverse, a virtual world, companies can buy, develop and rent virtual real estate. NFTs can be used to represent and trade ownership rights to these virtual properties.

Ticketing and events: NFTs can be used as digital tickets for events, preventing counterfeiting and tracking secondary sales.

Licensing and rights management: NFTs can be used to manage intellectual property and license rights. This is realized via smart contracts that clearly define the ownership of NFTs and make them traceable.

How can companies benefit from NFTs?

The examples just mentioned show that the “field of activity” of companies with regard to NFTs is very broad. The resulting benefits are correspondingly diverse, e.g:

New sources of revenue: By selling NFTs, companies can tap into additional revenue streams, be it through the sale of digital artworks, virtual goods or ticketing.

Increased brand loyalty: NFTs can increase customer loyalty by offering exclusive and limited edition digital products that encourage customer engagement.

Innovation and competitiveness: The use of NFTs can help companies to be perceived as innovative and technologically advanced, which can give them a competitive advantage.

Certificates of authenticity and proof of ownership: NFTs provide a transparent and secure way to prove the authenticity and ownership of digital and physical goods, creating trust with customers.

Global reach and interoperability: NFTs can be traded globally and are not limited to specific markets or platforms, expanding the reach and potential market for companies.

NFT and sales tax

In practice, NFTs give rise to a whole range of tax issues. This is mainly due to the fact that NFTs are still relatively “young” and therefore lack specific tax regulations.

For example, it is essential to clarify whether the seller or supplier is an entrepreneur in the VAT sense at all. Determining the assessment basis also plays a major role for VAT, as the recipient of the service normally pays with cryptocurrency. This cryptocurrency must be converted into a fiat currency based on the last selling rate.

Furthermore, the following problems and questions arise when considering NFTs and VAT:

Service or delivery?

It is not always clear whether the sale of NFTs constitutes a service or rather a supply. As a supply, the sale of NFTs would be equated to the sale of goods. As a service, the NFT sale would correspond to a service.

Currently, it is predominantly assumed that the sale of NFTs is a miscellaneous supply within the meaning of Section 3a UstG, as NFTs are intangible digital assets. In this case, the place of performance is the location of the recipient. However, it is also possible that NFTs relate to real assets, in which case only the entry in the database is traded, not the asset itself.

Problems with the recipient location

The “nature” of NFTs and their trading on decentralized platforms creates certain difficulties with regard to identifying the recipient’s location, as this is pseudonymized by the blockchain technology via the crypto wallet address. It is therefore virtually impossible to determine a billing address, IP address or other economically relevant information. This creates complications, particularly in international trade and the associated question of who is allowed to charge VAT.

Royalties – Investments on the secondary market

With NFTs, it is often agreed via smart contracts that the original seller participates in sales via a secondary market. The seller then receives so-called royalties. This participation corresponds to the resale right remuneration for authors of works of art, for which no VAT is payable (basis: Resale Rights Directive, confirmed by the ECJ). However, it is not clear whether this can also be transferred to NFTs. It is questionable here, for example, whether the NFT is to be considered a work of art in individual cases.

Conclusion on NFTs and VAT

There are currently a host of unanswered questions and challenges regarding the VAT treatment of NFTs. Neither the courts nor the tax authorities have taken a clear position on this. This is simply due to the fact that digital business models with NFTs are hardly or only partially compatible with the usual VAT audits. This makes it all the more important to seek professional tax law support when it comes to NFTs and VAT.