ICO in Lithuania
Conducting an ICO in Lithuania must comply with local legislation. The country positions itself as a leader in the FinTech sector, and as an outcome, regulators have published an ICO directives to enhance clarity and clarity in regulatory, tax, and fiscal record-keeping conditions for ICOs in Republic of Lithuania. In today's material, we explore the peculiar statutes of the initial coin offering in the Republic of Lithuania, which will be relevant for those considering this jurisdiction for launching a crypto business.
What is an ICO?
ICO stands for any Initial Coin Offering (token) aiming at money raising or investments for the creation of a new product, service, business, or its activities. The organization of ICOs in Lithuania is not regulated by specific statutes; still, considering various ICO models and the characteristics of the suggested coins, in some cases, such operations may be subject to oversight by the Bank of Lithuania and monitored by financial legislation.
Lithuania is a major domain for monetary technologies in the European Union and is recognized as one of the most attractive jurisdictions for the fintech industry, ranking as the 4th largest Fintech hub worldwide. Regulation favorable to financial technologies, a friendly regulatory attitude, innovative infrastructure, and the availability of a skilled workforce have been defining factors for many fintech companies. According to the FDI Intelligence Index of Attraction of Foreign Direct Investments in Technology Startups for 2019, Vilnius ranks 1st in the world.
The predominant kinds of fintech enterprises currently established in Lithuania are providers of payment and money transfer services. However, the country has also become an attractive center for many other startups, comprising providers of financial software services, aspiring banks, digital bankers, online investment and peer-to-peer service providers, lenders, identity verification service providers, as well as insurtech and regtech companies.
Regarding the COVID-19 outbreak, Lithuania's financial technology industry remains relatively stable. Due to Brexit, participants in the UK's financial technology industry have utilized Lithuania as a preferred platform, seeking the most attractive business location within the EU.
The Bank of Lithuania has recently embarked on a significant project, the initiating of an Anti-Money Laundering (AML) Center of Excellence. In October 2020, the Lithuanian government approved the implementation of the AML Center of Excellence, representing a unique public-private partnership aimed at bolstering counter-financial crime measures and combating the funding of criminal actions.
ICO governance in Lithuania
In general, there are no types of fintech entities prohibited in the judicature. However, the Bank of Lithuania has expressed its position, stating that regulated participants in the financial market (those with licenses or permissions to provide financial services) should not engage in operations or offer services related to virtual assets. Companies looking to do so must obtain other relevant permissions.
Regarding fundraising, Lithuanian legislation provides fintech enterprises with the opportunity to issue bonds, which, depending on the company's form, can be offered publicly. Investors may also be invited to participate in private placement programs.
Fintech companies can also seek venture capital or early-stage fund investments and raise funds through crowdfunding platforms. However, obtaining bank loans can be a challenging task for startups, as banks typically finance only companies with a reliable reputation and sufficient collateral. ICO registration in Lithuania is also permitted in this jurisdiction. During 2017–2018, there was active growth in the number of Initial Coin Offerings (ICOs), and Lithuania became one of the leading countries that attracted capital through ICOs. Later, this trend shifted with the introduction of Security Token Offerings (STOs) compliant with regulatory requirements; however, by 2020, such financing in the market was relatively rare. Conducting ICOs in Lithuania still enjoys popularity.
As mentioned earlier, in 2018, the Ministry of Finance of Lithuania published detailed directives for Initial Coin Offerings (ICOs), clarifying the nuances of launching ICO projects or selling virtual tokens. Since the ICO market is not yet regulated, the guiding principles of ICOs establish conditions under which the issued tokens may be characterized as securities and, consequently, fall under the legislation overseeing monetary market instruments, securities, and collective investment entities.
The guidance is divided into four parts:
- Regulatory aspects;
- Taxation issues;
- Anti-Money Laundering (AML).
Regulatory aspects of launching an ICO in Lithuania
As is the case in numerous other legal environments, Lithuania does not have specific rules supervising Initial Coin Offerings (ICOs). However, if organizations plan to deliver regulated banking services or conduct ICOs in Lithuania using tokens that represent securities, this activity will undergo thorough research by the supervisory body.
The guidelines explicitly state that a token is likely to be considered a security if it "entitles the holder to profit or control rights" or if it provides the owner with certain rights that may indicate the token has characteristics of securities. These rights comprise:
- Participation in the company's management process;
- Receipt of a portion of the company's profits;
- Receipt of a portion of the company's income;
- Receipt of interest on invested funds;
- Return of invested funds; and
- Receipt of additional income through token redemption.
If the token doesn't give the holder profit or control rights (for example, if it grants the right to use a product or service and is a utility token), it will not fall under the securities regulations, but the provisions of the Civil Code of Lithuania will apply. If the token is utilized as a transaction tool or for charitable contributions, the regulations under Anti-Money Laundering (AML) laws will be applicable.
Registration of an enterprise for ICO in Lithuania: taxation
The tax system for crypto-assets has displayed notable variability and, at times, lack of clarity in several prominent ICO domains. The guidelines seek to bring clarity to the situation in Lithuania.
The following taxes may be levied in the country:
- Corporate Income Tax Treatment
Proceeds obtained from Initial Coin Offerings (ICOs) will be excluded from corporate earnings tax provided that the tokens qualify as securities or utility coins. In cases where tokens merely represent payment confirmation without conferring specific rights, the funds generated will be acknowledged as income at the time of token issuance.
- Income Tax
A flat tax rate of 15% will be imposed on the earnings resulting from personal payments comprising the buying and selling of tokenized money.
- Value Added Tax (VAT)
The issuance of tokens is not subject to VAT. Whether expenses related to ICO can be deducted for VAT purposes depends on the nature of the activity to be launched. Regarding mining, the mining activity itself is not subject to VAT, and the sale/exchange of mined virtual currency for fiat or other tokens is not subject to VAT. However, miners will be subject to VAT when providing mining services to others for a fee.
Launch of an ICO project in Lithuania: accounting and reporting
As of today, regulatory authorities pay little attention to how crypto-assets are accounted for in a company's books. Lithuania's guidelines seek to address this gap.
Should the issuer of tokens experience gains from overseeing the platform post-ICO in Lithuania, with ICO-associated expenditures directly connected to these gains, said expenditures can be acknowledged as acquisition expenses. Any other costs should be documented as expenses in the income statement. Tokens retained in the issuer's cryptocurrency wallet ought to be logged on an off-balance sheet account and treated as cryptocurrency units, factored in at fair value solely once a stable market for token transactions has been established.
The accounting treatment of the value received in exchange for issued tokens will depend on the nature of the token. For payment tokens, such value is usually recognized as revenue. Concerning utility tokens, the company typically needs to recognize any contingent liabilities. For security tokens, financial liabilities should be recorded based on the appropriate accounting method and type corresponding to the nature of the assumed obligations.
After acquiring tokens, a company must account for them at the acquisition cost and, during subsequent assessments, at fair value through profit or loss. Token holders typically treat payment tokens similarly to cryptocurrency coins used for payment purposes. Before use, utility tokens should be recorded as payment coins. After utilization, the obtained benefits should be recorded depending on the nature of the benefit and the possibility of further token usage. If a utility token is canceled after use, the company's user should record the difference between the value of the services/products received and the fair value of the utility token as profit/loss. In the case of security tokens, token holders usually record additional benefits as financial income or assets, depending on the nature of the benefit.
A company providing intermediary services recognizes cryptocurrencies acquired for trading purposes as inventory at the net sales price. After the sale, revenue and sales expenses are recorded.
Cryptocurrencies used as a transaction should be classified as financial assets, valued at fair price by presenting the change in fair value in the profit and loss statement. If any intermediary fees payable during the acquisition of cryptocurrency are deductible, they should be included in the acquisition cost. All expenses related to mining should be recognized as costs, and the mined cryptocurrency should be reflected at fair value by presenting the difference in fair value as income in the profit and loss statement.
Anti-money laundering requirements
The guidance notes that the 5th Anti-Money Laundering Directive was adopted by Lithuania on April 19, 2018, and amendments to the corresponding national legislation are currently being prepared. It states that the first round of amendments will focus on provisions related to virtual currency exchanges and wallet operators.
The Law of the Republic of Lithuania on the Prevention of Money Laundering and Terrorist Financing includes virtual currency exchange service suppliers and electronic wallet providers in the list of entities now subject to AML requirements. These requirements include customer identification, verification, transaction monitoring, reporting to competent authorities, and providing information upon specific requests, among other obligations.
It should also be noted that the Bank of Lithuania has outlined its position on virtual currencies and ICOs. Therefore, if the proposed tokens exhibit characteristics of securities, an approved prospectus must be prepared, endorsed by the regulatory authority, and they must comply with other requirements of the Securities Law. Furthermore, depending on the nature of the offering, legislative requirements related to crowdfunding, collective investments, provision of investment services, the secondary market, or the formation of a participant's capital in the financial market will be similarly applicable to ICOs.
It's important to note that officials and experts from different governmental bodies, such as Asset Valuation, State Tax Inspectorate, Bank of the Republic of Lithuania, Accounting and Audit Department, etc., have supported the preparation of ICO directives.
In conclusion, should you aim to explore company registration for an ICO in Lithuania, feel free to counsel with experts for more details. We are well-prepared to offer support throughout the entire phase of acquiring an ICO license in Lithuania and facilitating the registration of the initial offering in this jurisdiction and other EU countries.