Due to the ever raising prices of Bitcoin, many people became interested in investing in cryptocurrencies. For example, those who purchased Bitcoin in May 2020 at the then-market prices of less than USD 10,000 per Bitcoin can sell it in April 2021 for about USD 60,000 per Bitcoin. This is a substantial return for investment in a very short period of time. However, governments often take a large chunk of such profits in the form of capital gains taxes. That is why many crypto investors consider relocation to a country having a favorable taxation with regard to cryptocurrencies.
In this article, we will examine the advantages and disadvantages of the Slovenian cryptocurrency tax regime, thus allowing investors considering a relocation to Slovenia to make an informed decision.
The main advantage of the Slovenian crypto tax regime is that, if cryptocurrencies are traded outside of a permanent business activity, the capital gains from their trade will not be subject to any capital gains tax.
A: Ambiguity with regard to the term “permanent business activity”
In Slovenia, there are no clear guidelines as to the meaning of a “permanent business activity”. The Financial Administration of the Republic of Slovenia (FURS) has a sole discretion in determining whether or not a trader is engaged in a permanent trading business activity. Needless to say, this means that cryptocurrency traders cannot have legal certainty as to whether their transactions will be tax exempt.
If the FURS concludes that a given trader conducts permanent business activities, his income from crypto trading will be regarded as “personal business income” under the Personal Income Tax Act (ZDoh-2). Such income, after deducting the applicable business expenses, will be subject to a progressive tax rate of up to 50%. The rate of 50% applies to income above EUR 72,000. In the context of cryptocurrency trading, the threshold of EUR 72,000 is not that high and many Slovenia-based traders may part with half of their profits from trading if the FURS finds, in its sole discretion, that they conduct permanent business activities.
B: Mining is taxed even if it falls outside of the scope of a permanent business activity
Another major disadvantage of the Slovenian tax regime is that it regards income from mining and similar activities falling outside of the scope of a permanent business activity as “other income” under Article 105 of ZDoh-2. Such income is subject to a progressive tax rate of up to 50% and the costs incurred in relation to mining are not deductible from the tax base.
C: Relatively high corporate tax
Some countries charge high personal income taxes and have no or low corporate income taxes. However, this is not the case in Slovenia. The country charges the corporate income generated by all cryptocurrency-related activities (after deducting the applicable expenses) with a corporate income tax at the rate of 19%. This rate is quite high in comparison with the rates of various low-tax European countries. For instance, Bulgaria has a flat rate corporate income tax of just 10%.
D: Taxation of tokens distributed free of charge during ICOs
Slovenia taxes the free of charge distribution of tokens during initial coin offerings (ICOs). More particularly, if the tokens are gratuitously distributed to a person who owns more than 25% of the business shares in the issuer, the tokens will be subject to a flat tax rate of 25%. In case the tokens are received with regard to employment or other contractual relationship for performing services, the income will be subject to a progressive tax rate of 50% as well as social security contributions. All other cases of token distribution during ICOs will be subject to a tax rate of up to 50%. The taxable income is calculated based on the white paper price or the market price (depending on whether the token is publicly traded).
E: The Slovenian tax regime may change
Since the FURS has recently regulated cryptocurrency for the first time, the current tax regime exempting private trading from capital gains tax does not have a solid foundation and may be changed unexpectedly.
At first sight, Slovenia seems to be a crypto tax haven as it does not charge capital gains tax on private trading of cryptocurrencies. However, due to the lack of guidance regarding “permanent business activity”, cryptocurrency investors cannot have legal certainty as to whether they are actually exempt from capital gains. If it appears that they are not tax exempt, they will be subject to a tax of up to 50%.
Contact De Hoon and Partners, famous crypto tax consultants for better solutions. Mail us : firstname.lastname@example.org