Source: https://www.globallegalinsights.com/practice-areas/blockchain-laws-and-regulations/estonia
Timestamp: 2019-04-22 14:17:20+00:00

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According to Wired magazine, Estonia is the “most advanced digital society in the world”.
The most important Estonian state e-solution is called “X-Road” – the open-source backbone upon which Estonia’s entire digital infrastructure runs, allowing the nation’s various e-service databases, both in the public and private sector, to link up and operate in harmony. Although X-Road is not based on blockchain and does not use it internally, both blockchain and X-Road use cryptographic hash functions for linking data items to each other. X-Road lacks a centralised or master database; all information is held in a distributed data system and can be exchanged instantly upon request, providing access 24/7. Estonia is probably the only country in the world where 99% of public services are available online 24/7.
The Estonian government has been testing blockchain technology since 2008 (at that time, this technology was called “hash-linked time-stamping”). Since 2012, KSI Blockchain technology, developed by Estonian-based company Guardtime, has been in production use to protect Estonian governmental data registries such as the national health, judicial and legislative systems, with plans to extend its use to other spheres such as personal medicine, cybersecurity and data embassies. Incidentally, KSI is used by NATO and the US Department of Defense.
Nearly every one of the country’s 1.3 million citizens has a state-issued digital identity and an ID card, which functions as much more than simply a driver’s licence or passport. This eID uses a public key encryption and allows a person to be verified in an online environment. This is what allows a person digital access to things such as the voting system or the ability to fill a pharmaceutical prescription.
Estonia is also a pioneer in e-Residency, which enables people around the world to receive a virtual residency in Estonia, with access to the digital solutions provided by the government.
In 2014, Estonian commercial bank LHV Pank developed and tested a blockchain-based financial product called CUBER (Cryptographic Universal Blockchain Entered Receivables) and mobile app called Cuber Wallet. CUBER is meant to be a building block for various innovative financial products.
Estonia has already enacted specific anti-money laundering (AML)/counter-financing of terrorism (CFT) regulations applicable to services related to cryptocurrencies (custodian wallet service and exchange service), as from November 27, 2017. Thus, Estonia is the first EU member state to follow the approach of the draft Fifth EU Anti-Money Laundering Directive (5AMLD).
Cryptocurrencies do not possess a legal status of currency or money, but they can be accepted by natural and legal persons, as a means of exchange or payment.
Estonia is the first EU country to provide clear regulation of cryptocurrencies, cryptocurrency exchanges and custodian wallet service providers for AML/CFT purposes.
The definition and legal nature of cryptocurrencies (i.e., are they a right, thing or private money) in the civil law is unsettled, and there is no case-law on the subject in Estonia.
In this section we shall address the sale of cryptocurrency tokens by companies during their professional activities.
In order to assess which laws apply to a certain cryptographic token sale, the type of the token must be identified. There is no official regulation aimed at classification of crypto tokens, therefore it is advisable to involve a legal professional to provide a legal opinion on the classification of the respective token prior to initiating the sales process, as the results of the classification may considerably influence the legal obligations of the seller.
The Estonian Financial Supervisory Authority (EFSA) has published unofficial guidelines for ICO issuers and token traders on how to categorise crypto tokens issued in an ICO, and which laws apply to each category.1 According to these guidelines, cryptocurrency tokens are divided into two: tokens that grant their owner a reasonable expectation for profit or governance rights (commonly referred to as Security tokens); and tokens that do not promise any profits or monetary claims. The second group is further divided into three: cryptocurrency – payment instruments for products/services (the Payment tokens); charity (the Charity tokens); and tokens that grant access to a platform/system or a right to use a product/service (the Utility tokens).
The EFSA has explained that offering of tokens that fall under the definition of “security” as stipulated in § 2(1) of the Securities Market Act (SMA) brings legal obligations to the issuer/seller, infringement of which may result in considerable fines.
viii) greenhouse gas emissions for the purposes of the Atmospheric Air Protection Act.
In the context of crypto tokens, the most relevant definitions among these are i), ii), iv), v) and vi).
Tokens are shares, if they grant their owners rights to a holding in the company, rights to a share of profit, or voting rights in corporate matters. Under the Estonian Commercial Code (§ 148(5), § 226), shares grant shareholders: the right to participate in the management of the company and in the distribution of profit and of remaining assets on dissolution of the company; the right to participate in the general meeting of shareholders; and other similar rights prescribed by law or the articles of association.
Tokens are investment fund units or shares, if they represent a unitholder’s share in the assets of a common fund. According to the Investment Funds Act (IFA), a common fund is a pool of assets which is established from the money collected through the issue of units or other assets and assets acquired through investment of money, and which is jointly owned by unitholders. An investment fund is a legal entity or pool of assets, which involves the capital of a number of investors with a view to investing it in accordance with a defined investment policy for the benefit of the investors in question and in their common interests.
According to § 2(2) of the SMA, a money market instrument is an unsecured, transferable and marketable debt obligation, which is traded on the money market, including a treasury debt obligation, commercial paper, certificate of deposit, bill of exchange secured by a credit institution, or other security complying with the aforementioned characteristics, stipulated in Regulation 2017/565 (EU) of the European Parliament and of the Council2 (EU 2017/565) article 11. According to the aforementioned regulation, the money market instruments shall have the following characteristics: (a) they have a value that can be determined at any time; (b) they are not derivatives; (c) they have a maturity at issuance of 397 days or less.
According to § 2(3) of the SMA, a derivative instrument is a tradeable security expressing a right or obligation to acquire, exchange or transfer, the underlying assets of which are securities, or the price of which depends directly or indirectly on: (a) the stock exchange or market price of the security; (b) the interest rate; (c) the securities index, other financial index or financial indicator, including the inflation rate, freight rate, emission allowance or other official economic statistics; (d) currency exchange rates; (e) credit risk and other risks, including climatic variables; or (f) the exchange or market price of a commodity, including precious metal.
The EFSA’s position seems to be that the tokens don’t have to correspond to these definitions literally in order to be regarded as securities, rather it is sufficient if the token has the overall characteristics of a security (substance-over-form approach). If the token corresponds to any of these characteristics, the offering of it may constitute the issuance of securities and, depending on its exact nature, be governed by the rules of public offering as prescribed in § 12 of the SMA. That being the case, it is required to register a respective prospectus at the EFSA.
v) an offer of securities with a total consideration of less than €2,500,000 per all the Contracting States in total, calculated in a one-year period, of the offer of the securities.
According to the EFSA guidelines, tokens shall be considered as payment tokens if they are also intended for use outside of the respective token issuer’s platform as payment instruments for other products and services provided by third persons. Payment token directly corresponds to the concept of “virtual currency” as defined in § 3(9) of the Money Laundering and Terrorist Financing Prevention Act (please see below).
Issuing or selling payment tokens to the public may fall under the definition of provision of the custodian wallet service according to the Money Laundering and Terrorist Financing Prevention Act (please see below).
According to the EFSA guidelines, a fundraising for the development of a business project shall be considered as a donation only under the condition that it does not lead to: (i) a participation in the issuer; or (ii) any obligation to repay the funds, interest, dividend, or any other repayment, or cash flow. In addition, no right of use of a service or product shall arise in connection with the donation. If the issuer is gathering donations in exchange to tokens, the issuer must expressly indicate that the token is a charity token. In such a case, the issuer will only have certain taxation obligations.
According to the EFSA guidelines, an ICO, where the tokens offered grant their purchasers access to a product or service, is in essence a prepayment for a product or service. Consequently – taking into account that the contracts entered into within an ICO use means of communication (a computer network) – such ICOs are subject to the provisions of the Law of Obligations Act (LOA) regarding the distance contracts entered into through means of communication and computer network.
Utility tokens are essentially commodities and the usual contractual obligations apply. Additionally, various consumer protection obligations must be met if the buyers are natural persons, such as the notification obligation and the obligation to allow the consumer to withdraw from the contract with simplified procedure.
Estonia has not enacted any specific tax regulation on ICOs or cryptocurrencies. Estonian tax legislation does not include any special tax rules for income, profits or gains arising from transactions involving cryptocurrencies, or for charges made in connection with cryptocurrencies. Still, Estonian tax authorities have issued formal guidance in relation to VAT and income tax treatment of cryptocurrencies and mining.
For the purposes of VAT, cryptocurrencies are considered as the same currency as euros, etc. Thus, the usage of cryptocurrencies as remuneration is equal to the usage of legal tender and therefore out of the scope of VAT.
The supply of services which consist of the exchange of traditional currencies for units of cryptocurrencies and vice versa, are financial transactions exempt from VAT. This approach is in line with the ruling C-264/14 of the European Court of Justice.
The services provided by miners are outside the scope of VAT. However, it is still unclear how the VAT treatment of the mining changes if a pool is used. Estonian tax authorities have not clarified VAT treatment of wallet service providers, yet. The standard VAT rate is 20%.
Estonia uses a distinctive corporate tax system in which the taxation of corporate profits is deferred until the profits are distributed. Any retained earnings are thus effectively tax-exempt as long as the shareholder(s) can defer profit distributions. Such exemption covers both active and passive types of income.
Corporate profits are subject to taxation upon distribution of dividend or other types of deemed or hidden profit distribution (e.g., liquidation proceeds, capital redemptions, representation expenses, gifts and donations, non-business-related expenses, transfer pricing adjustments).
Distributed profits are generally subject to 20% corporate income tax (20/80 on the net amount of the profit distribution). For example, an Estonian company that has profits of €100 available for distribution can distribute dividends of €80, on which it must pay corporate income tax of €20. Thus, the proceeds from an ICO are not taxed with corporate income tax at the rate of 20/80 until such proceeds are distributed to the shareholder(s).
From 2018, the corporate income tax rate on regular dividends was reduced from 20% to 14% over an ongoing three-year cycle. According to the new rule on regular profit distributions, the payment of dividends in an amount which is below or equal to the amount of average taxed dividends paid during the three preceding years, will be taxed at a rate of 14% (the tax rate on the net amount being 14/86 instead of the regular 20/80). In cases where the recipient of the 14% dividend is either a resident or non-resident individual, a 7% withholding tax rate will apply unless a tax treaty provides for a lower withholding tax rate (5% or 0%). There are also transitional rules. 2018 is the first year to be taken into consideration for the purposes of determining the average dividend.
For personal income tax purposes, cryptocurrency is treated as property, the alienation and exchange of which gives rise to capital gains. Income from trading in cryptocurrencies is taxed as business income which, in addition to personal income tax, is also subject to social security contributions.
Income received will be taxed at a 20% flat tax rate.
It is rather common that employees recruited early on may receive a certain amount of their yearly salary in the form of cryptocurrencies as a means of compensation and encouragement. Such compensation in non-monetary form should be taxed as fringe benefits under Estonian legislation.
Fringe benefits are any goods, services, remuneration in kind or monetarily appraisable benefits which are given to a person in connection with an employment or service relationship, membership in the management or controlling body of a legal person, or a long-term contractual relationship, regardless of the time at which the fringe benefit is granted.
Fringe benefits are subject to 20/80 income tax and 33% social security contributions (on a gross-up basis). The employer must calculate the tax on the total amount of all fringe benefits granted. The tax base for social security contributions purposes includes both the value of the benefit and the income tax paid on this benefit. Fringe benefits received by resident employees are not included in the taxable income in their annual income tax returns.
Before 5AMLD, EU financial authorities emphasised that exchanges where virtual currencies are traded and digital wallets used to hold, store or transfer virtual currencies, are unregulated under EU law. However, Estonia regulated virtual currency exchanges already under the AML law, which was in force as from January 2008 until November 27, 2017 (please see remarks below). Estonia implemented the 4AMLD (2015/849) and draft 5AMLD (2018/843) into its national law (the Money Laundering and Terrorist Financing Prevention Act, hereinafter MLTFPA) by November 27, 2017.
MLTFPA, among other changes, introduced new definitions and provided a clear new regulation for cryptocurrency exchanges and cryptocurrency wallet service providers.
‘Virtual currency’ means a value represented in digital form, which is digitally transferable, preservable or tradeable and which natural persons or legal persons accept as a payment instrument, but that is not the legal tender of any country or funds for the purposes of Article 4(25) of PSD2 or a payment transaction for the purposes of points (k) and (l) of Article 3 of the same Directive. It is interesting that the definition in MLTFPA is narrower than the one in 5AMLD. The latter makes it clear that virtual currencies may also be used for other different purposes and find broader applications such as means of exchange, investment, store-of-value products or uses in online casinos.
‘Virtual currency wallet service’ means a service in the framework of which keys are generated for customers or customers’ encrypted keys are kept, which can be used for the purpose of keeping, storing and transferring virtual currencies. This definition is a rather broad one, but it should not extend to non-custodian wallets, where the user (rather than the wallet provider) holds the private key. Thus, if the private key to the cryptocurrency is (also or exclusively) held by the wallet provider, the wallet service provider should be regarded as an obliged entity.
Providing only exchange of cryptocurrency to cryptocurrency will remain out of scope of the regulation.
ii) provide a virtual currency wallet service.
The application for authorisation can be submitted in the Register of Economic Activities accessible through the portal www.eesti.ee, or the webpage at https://mtr.mkm.ee. The state fee payable for the authorisation is €345. The Financial Intelligence Unit reviews the authorisation application no later than within 30 working days following the date of submission of the application. Prior to the grant of the authorisation, no services shall be offered.
Please note that the rules of operating in the relevant fields of activity subject to authorisation obligation have not been harmonised across the EU. An activity licence granted in another state of the European Economic Area does not grant the right to operate in Estonia, and vice versa.
In addition to authorisation, obliged entities under the MTFPA are required to perform AML/CFT due diligence measures in respect to their clients, including identification, verification obligations and monitoring of each of the business relationships.
The main area that will create a struggle for crypto-businesses in Estonia is the banks, i.e. opening a bank account and operating payments, as the banks are quite sceptical when it comes to cryptocurrency. In order to at least have a chance to open a bank account, a clear and transparent business model, transparent identity of the company (group structure/shareholders, etc.), effective AML/KYC procedures need to be in place. Therefore, the non-regulated cryptocompany should contact its co-operations partners who are obliged persons under MLTFPA (e.g. banks) in advance to ensure that the company can comply with their internal regulations and requirements.
In early 2014, the proprietor of Bitcoin trading platform BTC.ee, Otto de Voogd, was ordered by the Estonian Financial Intelligence Unit of Estonia’s Police and Border Guard to provide information on all of his clients. The operations of the Estonian version of the site were halted in February 2014, and de Voogd began legal proceedings against FIU in Estonian courts.
Finally, his appeal in cassation was assessed in the country’s Supreme Court. The Supreme Court ordered Estonia’s Ministry of Finance, Ministry of Interior, the Bank of Estonia and the Financial Supervision Authority to give opinions on the legality of Bitcoin and on de Voogd’s case, specifically on the following: whether Bitcoin trading is under the jurisdiction of Estonian AML/CFT regulations and whether Estonian law on money laundering and terrorist financing is in conformity with the EU law (3AMLD) and with the recommendations of FATF, and whether Bitcoin exchange providers are “alternative mean of payment service providers” as defined by the Estonian AML/CFT law effective in 2014.
On April 11, 2016, the Supreme Court confirmed that Bitcoin exchanges are subject to Estonian AML/CFT regulation and supervision as “alternative mean of payment service providers”, in particular, the requirement to identify clients where the client turnover is over €1,000 per month. This important ruling clarified the vague definition of “providers of alternative means of payment”, and affirmed the applicability of traditional AML/CFT regulations to innovative business models such as crypto exchanges if they operate in Estonia.
To date, Estonia has no official, state-backed promotional or testing programmes or policies intended for the promotion of cryptocurrencies and blockchain technologies. This, however, doesn’t mean that the state authorities are totally passive or oblivious about the benefits and the need to create appropriate conditions for these technologies, in order to gain competitive advantage over other states that wish to stand out and direct crypto-related capital to their jurisdiction. In the past, Estonia has always been very competitive when it comes to gathering recognition with its innovation and technology-friendly approach and legal atmosphere, and this was also the case with blockchain-related technologies at first.
After the 2015 Parliament elections, the new government coalition stated in its action programme that it will develop an official policy for recognition and use of virtual currencies,3 and the Ministry of Finance even published respective initial analysis by mid-2016.4 The new coalition that came to power in November 2016 didn’t follow such devotion to blockchain-related technologies; respective reference was left out of their action programme, and development of this policy was interrupted. Therefore, currently Estonia has no official policy on promoting and regulating cryptocurrencies or blockchain technologies at the government level. Nonetheless, there have been roundtables and forums on these topics, initiated by ministries. Furthermore, despite respective suggestions by participants of these forums, tangible policies are yet to be developed.
i) The community function – Estcoins could be used as incentives for ensuring the growth and promotion of the e-Residency programme by the community.
ii) The identity function – Estcoins would be tokens used for activities within the e-Residency infrastructure for identification purposes.
iii) The euro function – Estcoins would be an alternative currency to euro with 1 estcoin = 1 euro.
Despite these suggestions, the actual implementation of estcoins in the near future is unlikely.
One of the most visible private sector organisations when it comes to promoting and raising awareness of blockchain technologies and cryptocurrencies is the Estonian Cryptocurrency Association. Established in October 2014, the Association is a non-profit organisation, the purpose of which is to promote more widespread use of cryptographic resources and make the Estonian cryptocurrency regulatory environment more attractive to investors and crypto-enthusiasts. The Association organises workshops and training on blockchain technologies, instructs people interested in cryptocurrencies, and acts as the main and most active interest group engaging in discussions with the government, supervisory and regulatory bodies.
Specifically for the purposes of cryptocurrencies, there are no restrictions on investment managers owning cryptocurrencies for investment purposes, nor are there any licensing requirements imposed on someone who holds cryptocurrency as an investment advisor or fund manager under Estonian legislation. However, if the crypto-token in question were to be classified as a security token (see above), the same restrictions to ownership of the respective token would apply as for investment managers and advisors providing services in the field of the stock market. These restrictions include the obligation to avoid conflict of interest that, in some cases, could mean restrictions on ownership of certain security tokens.
Mining is permitted, but Estonia has not enacted any specific legal or tax regulation on mining activities.
EFSA has stated that mining cryptocurrency as a field of activity does not fall under the supervision of the Authority.
When a new block is created by the requisite unique identification process and verification by the network, the miner gets rewarded. In this regard, there is no contractual relationship with the miner and there is no supply for consideration for VAT purposes when the reward is granted. Therefore, there does not seem to be a supply for VAT purposes, and the mining of cryptocurrency is outside the scope of VAT.
To date, there are no border restrictions or obligations to declare cryptocurrency holdings pursuant to Estonian legislation.
Estonian legislation doesn’t stipulate reporting obligations to individuals making payments in excess of a certain value.
However, obliged entities under applicable AML/CFT regulation have the obligation to monitor the business relationships with their clients in order to identify activities that could indicate suspicious money laundering-related activities. In some cases, large transactions may be considered indications of such suspicious activities, especially if it is uncharacteristic to the usual transaction related to the specific client. When the obliged entity identifies suspicious activities that could reference to money laundering or terrorist financing, it should notify the Financial Intelligence Unit.
Cryptocurrencies are not treated differently from ordinary assets for the purposes of estate planning and testamentary succession under Estonian legislation.
3. Governmental action plan for 2015-2019, available at: https://www.riigiteataja.ee/aktilisa/3030/6201/5006/231klisa.pdf.
4. Analysis on the potentiality of development of a policy of recognition and use of virtual currencies, available at: https://www.rahandusministeerium.ee/system/files_force/document_files/2016-vv_virtuaalvaaringute_analuus-22-07.pdf?download=1.
5. Estonia could offer “estcoins” to e-residents, available at: https://medium.com/e-residency-blog/estonia-could-offer-estcoins-to-e-residents-a3a5a5d3c894.
7. We’re planning to launch estcoin – and that’s only the start, available at: https://medium.com/e-residency-blog/were-planning-to-launch-estcoin-and-that-s-only-the-start-310aba7f3790.

References: § 2
 § 226
 § 2
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 § 12
 § 3