Switzerland

Switzerland is an advanced jurisdiction for tokenisation transactions, with the passing in 2021 of the DLT Act, which amended current Swiss laws to include crypto assets and DLT. Commonly, limited liability stock corporations (SA/AG) or limited liability companies (GmbH, SàRL or Sagl) are established for tokenisation structures. Both entities have an establishment time of one to four weeks. An SA requires a minimum share capital of CHF 100,000, of which at least CHF 50,000 must be paid up (with each share having a nominal value of at least CHF 0.01), whereas a GmbH requires a minimum share capital of CHF 20,000 made up by fully paid-up shares of CHF 100 or more. It should be noted that whilst Swiss law does not have the concept of a trust, foreign trusts have been recognised since 1 July 2007.

The Swiss tax and regulatory positions each depend on the classification of a crypto asset. The Financial Market Supervisory Authority (FINMA) differentiates between payment tokens, utility tokens and asset tokens (a category that includes security tokens and tokens which allow physical assets to be traded on the blockchain). A token that is classified as an asset token is treated as a security by FINMA under Swiss law and as such is subject to Swiss securities laws such as the Financial Services Act (FinSA) and the Financial Market Infrastructure Act (FMIA) with respect to offering or trading in them, together with civil law obligations under the Swiss Code of Obligations. Furthermore, FinSA requires that a prospectus be published in relation to an initial coin offering of an asset token. FinSA sets out certain exceptions to the publication of a prospectus, including for offerings (i) to professional investors; (ii) to fewer than 500 investors; (iii) to investors that invest over CHF 100,000; (iv) with a minimum denomination of CHF 100,000; or (v) that are limited to a total of CHF 8 million.

Switzerland currently lacks specific legislation for the taxation of crypto assets. Consequently, and whilst the guidelines around the taxation of tokens are evolving, the general national tax law principles apply. It should be noted that the characteristics of each token must be analysed on a case-by-case basis in order to determine tax treatment. For tax purposes, it is not possible to rely on the FINMA classifications as set out above; a further tax analysis is required to be conducted. The Federal Tax Administration does, however, continue to publish updates to its tax information in relation to crypto assets.

Jersey

Jersey is a well-established jurisdiction for DLT transactions, with an existing legal framework dedicated to the progression of this industry. Commonly, Jersey public limited companies (JPLC) established as orphan SPVs are used for tokenisation structures. These entities are straightforward to establish, with a four-to-six-week lead time and no regulatory requirement in relation to their authorised or issued share capital. The Jersey Financial Services Commission (JFSC) categorises an exposure to digital assets or cryptocurrencies as a “sensitive activity”. This therefore requires increased anti-money laundering and anti-terrorist financing checks on the JPLC. Further, it will be important to ensure that any security tokens issued retain the characteristics usually associated with a debt security, in order to ensure that the transaction is classified as a securitisation as opposed to a collective investment scheme.

This jurisdiction is attractive from a regulatory and tax perspective, as the JFSC currently caters for fintech business activities (including the sale of security tokens) under its existing regulatory framework. Likewise with respect to tax, Jersey operates a tax-neutral environment, with no withholding tax or VAT applicable to a JPLC. Furthermore, there is no tax applicable on the transfer of digital assets, nor are there any digital asset specific taxes currently in operation in Jersey.

Digital asset and initial coin offerings must comply with Jersey prospectus requirements, and the issuer must take appropriate steps to manage the risks of investment by retail investors (if applicable). This can often be fulfilled by way of an active confirmation of risk warning.

Liechtenstein

Liechtenstein was one of the first countries to establish a comprehensive system of regulation of the token economy. In 2020, the country introduced a legal framework for tokenisation under the Token and Trusted Technology Service Provider Act (TVTG), which allows nearly any right or asset to be packaged into a token. The TVTG seeks to regulate client and asset protections, together with creating a supervisory framework for service providers within the tokenisation economy. Commonly, either a company limited by shares (Aktiengesellschaft or AG – this being the most frequently used entity) or a limited liability company (GmbH – this entity often being used for smaller token issuers) is used for tokenisation structures. AG entities have a minimum share capital requirement of CHF 50,000, and GmbH entities have a minimum share capital of CHF 10,000. In both cases, the share capital can be paid up in cash, in-kind contributions or a combination of both, and the entity must have its registered office within Liechtenstein.

Liechtenstein has a well-established trust regime and in order to establish a tokenisation platform, the issuer will be required to register with the Financial Market Authority (FMA). The issuer will also most likely require an investment firm licence for the issuance of security tokens. The FMA must decide upon an application within three months and once a token has been issued, the issuer must continue to report to the FMA. A benefit of the Liechtenstein structure is that the issuer is able to communicate with the FMA in advance of a final submission in order to submit a supervision request (Unterstellungsanfrage). This allows the issuer to obtain official feedback in relation to the type of licences and other requirements that would be required for the deal. Furthermore, know-your-client and anti-money laundering regulations will also apply to token issuers, under the Due Diligence Act.

Liechtenstein recognises four categories of token: utility tokens, equity or security tokens, currency tokens, and contribution or donation tokens. The taxation of a token depends on the categorisation of the token, which is determined based on its specific characteristics. The FMA will assess any initial coin offering on a case-by-case basis in order to determine the tax treatment. It is therefore advisable for participants to contact the FMA throughout the establishment process.

If tokenised securities are to be publicly offered in Liechtenstein, a securities prospectus, governed by the EU Prospectus Regulation, may need to be prepared. Furthermore, whilst Liechtenstein currently takes the benefit of the TVTG, it will also look to take the benefit of the EU’s Markets in Crypto-Assets Regulation (MiCAR) going forward. The TVTG in many ways served as a model for MiCAR and consequently only minor amendments to the TVTG are expected following the application of MiCAR from 2024. Further information on the EU Prospectus Regulation and MiCAR is set out in the section on European Union regulation below.

Luxembourg

Luxembourg has been seen as one of the most proactive jurisdictions within Europe with its efforts to pave the way for the growth of the digital asset sector. Issuing vehicles can take the form of a securitisation company, commonly a public company limited by shares (SA or société anonyme) or private company limited by shares (SàRL or société à responsabilité limitée), or alternatively as a securitisation fund established by way of an orphan fund and management company registered in Luxembourg. In all cases SPV issuers can be established. Within this jurisdiction, a common structure for a real estate tokenisation, using either an SA or a SàRL, is to tokenise all (or a portion of) the shares in the SPV that owns all or part of the property/properties. A minimum share capital of €12,000 is applicable to a SàRL, which must be fully subscribed and paid up at incorporation, and in the case of the SA, the minimum required capital of €30,000 must be fully subscribed at the incorporation and paid up to a minimum of 25%. In the case of a securitisation fund, only the management company will require a formal incorporation process and a signed-up share capital.

Luxembourg currently operates under its existing tax regime in relation to digital assets, with no specific additions for this asset class. Under an initial coin offering, it is likely that the issuer will be subject to corporation tax; however, no VAT or stamp duty would be applicable.

Germany

Germany is a progressive jurisdiction and has always been regarded as a hub for start-up activities. The government in 2019 published a comprehensive blockchain strategy designed to encourage participation and foster growth within this technology space. Commonly, German limited liability companies (Gesellschaft mit beschränkter Haftung – GmbH) are established for tokenisation transactions. Establishment follows a prescribed process which, along with notary requirements, takes three to four weeks and requires at least €25,000 as the share capital of the GmbH.

Germany currently operates under its existing tax regime in relation to digital assets, with no specific additions for this asset class. Typically, a GmbH is subject to corporate income tax and trade tax (averaging 31%), but no withholding tax is applicable. In relation to an initial coin offering, the tax treatment will depend on the transaction structure and whether the issued tokens represent equity or debt. If the tokens qualify as debt, their issue price will need to be recorded as a liability on the issuer’s tax balance sheet.

European Union regulation: Luxembourg, Germany and Liechenstein

Luxembourg, Germany and Liechtenstein are each bound by the EU Prospectus Regulation, which governs the content of any applicable prospectus issued in connection with a security token offering. Publication of a prospectus will be required when a digital asset (such as a security token) qualifies as a financial instrument and the offering is for more than €8 million. A security token is likely to be characterised as a financial instrument if: (i) it is issued in a standardised form; (ii) it is transferable/negotiable on the capital markets; and (iii) it has characteristics similar to those of shares, bonds or other securities.

Likewise, Luxembourg, Germany and Liechtenstein will each take the benefit of the EU’s MiCAR, which is taking effect in stages throughout 2024 and creating an EU regulatory framework for the issuance and dealing in crypto assets, including licensing, conduct of business and market abuse regimes. The new rules cover transparency, disclosure, authorisation and supervision of transactions and are expected to have a significant impact on the digital asset market within the EU. MiCAR will apply only to utility tokens, asset-referenced tokens and e-money tokens, and will not apply to digital assets qualifying as financial instruments.

UAE

The UAE is a dynamic jurisdiction committed to evolving with emerging industry needs and is strategically well placed to cater both for the EME and Asian markets. There are specific real estate ownership requirements to consider when establishing within the UAE, as the purchase and ownership of property is a tightly regulated activity. UAE law does not permit more than four owners to be listed on the title deeds of a property and the ownership of a property itself cannot be tokenised. The Dubai Financial Services Authority (DFSA) has sought to overcome this restriction through the development of a specific crowdfunding licence, which includes a subcategory of licence for the crowdfunding of real estate. The tokenisation product offered through this licence is linked to the benefits derived from the real estate itself, or to a loyalty or utility purpose linked to such real estate.

A tokenisation programme in the UAE can be established either by way of a fund or a crowdfunding licence, noting that in both cases the tokens issued would not lead to co-ownership of the real estate itself. The UAE, particularly in free zones such as the Dubai International Finance Centre (DIFC), has developed, and is continuing to develop, comprehensive regulatory frameworks to cater for the digital asset and tokenisation markets. Examples include the introduction of the Investment Token Regulation and the Crypto Token Regulation. These regulations govern advising on, dealing in, arranging, trading in and custody of crypto assets for transactions established within the DIFC. Furthermore, the Virtual Assets Regulation, which took effect in 2023, will supplement the region’s increasingly sophisticated crypto asset regime. An additional and significant benefit offered by this jurisdiction is its favourable tax treatment, with establishments within the DIFC benefiting from a 50-year tax holiday.

United Kingdom (England and Wales)

The United Kingdom is a jurisdiction keen to remain at the cutting edge of innovation and forward-facing technology such as blockchain. The UK government is currently debating enhanced legislation for this industry, with a view to further regulating this space and providing additional frameworks for the development of this market within the UK. Once in place, the UK will be at the forefront in regulating this technology; this article examines the position as it currently stands within the UK, together with proposals for reform. Commonly, public limited companies (PLCs) established as orphan SPVs are used for tokenisation structures. The establishment of PLCs at Companies House requires a share capital of £50,000, with at least 25% being paid up in full. It should be noted that the Law Commission is consulting on whether additional crypto-specific regulations should also be introduced to cover the establishment stage.

All UK firms, including PLCs, undertaking crypto asset activities must comply with the UK’s Money Laundering Regulations 2017 and register with the Financial Conduct Authority (FCA) before conducting crypto asset-related business. If a token has a similar characteristic to a share or debenture, any regulated activity in relation to such token likely will be regulated within the UK. Whilst there are currently no specific regulatory regimes that cover crypto assets, this is within the UK’s current regulatory pipeline. The Law Commission has also published recommendations for crypto currencies, which include the characterisation of a new form of property rights over crypto assets, and is in the process of reviewing the applicability of existing securities regulation to crypto assets. The tokenisation industry is keenly awaiting the outcome. Likewise, there are no specific tax regimes or favourable tax treatments currently applicable to crypto assets within the UK.

Digital asset and initial coin offerings must comply with the UK Prospectus Regulation, which consists largely of the on-shored provisions of the EU Prospectus Regulation. All UK prospectuses will need to be reviewed and approved by the FCA. In June 2023 the UK government published a near final draft of the Public Offers and Admissions to Trading Regulations 2023. Under the proposals it will only be possible to make a public offer under a UK prospectus under an available exemption, which includes: (i) an offer solely to qualified investors; (ii) an offer to fewer than 150 UK based persons (other than qualified investors); and (iii) an offer with a denomination of at least £50,000. It is encouraging to see the regulatory emphasis dedicated to this industry by the UK government. It is likely that the crypto asset landscape will continue to evolve over the coming years, with the incoming legal framework adding much needed certainty and stability to the UK market.

United States (including Delaware)

The United States operates on a system of federal law across the nation, state law across each state and local law across certain counties and municipalities. With that in mind, and unlike in other jurisdictions, treatment of tokenisation transactions may vary across states and consequently careful consideration as to the choice of state will need to be made at the time of structuring the tokenisation. The United States has little crypto-specific regulation at the federal level, with continued debate as to whether cryptocurrencies should be regulated as securities by the Security and Exchange Commission or as commodities by the Commodity Futures Trading Commission (CFTC). This notwithstanding, Delaware remains a popular state for the establishment of tokenisation SPVs, with the state also having passed laws to permit securities to be registered and held on the blockchain, and SPV establishment timeframes being as little as one week with no minimum share capital requirement.

In addition, Delaware amended its General Corporation Law in 2017 to allow companies to use the blockchain to issue and track shares. This has allowed for innovative tokenisation structures to develop, one such example being for each property to be owned by a legally independent Delaware limited liability company (LLC): instead of the property itself as held by each LLC being tokenised, the membership interests of the LLCs themselves are tokenised, allowing the membership shares to be fractionalised on the blockchain.

Cryptocurrency exchanges within the United States are subject to the same anti-money laundering requirements as other entities which handle funds, and further regulatory developments are likely to be implemented by the Responsible Financial Innovation Act, introduced in the Senate in July 2023, which would, among other things, give the CFTC regulatory responsibilities for crypto assets. Similar to the UK, the United States is experiencing increased emphasis on the development of more robust and comprehensive regulations at federal and state level. These are eagerly awaited as they will have the potential to influence emerging jurisdictions’ tokenisation policies going forward.

Conclusion

A fundamental element of establishing a tokenisation structure is the jurisdiction of the issuing entity, with key considerations including the legal status of the entity, the ownership structure, regulation and tax. Whilst each tokenisation transaction will have specific structural requirements that will necessitate bespoke advice, this article sets out several of the key jurisdictions at the forefront of this market.

Please note that no part of this article constitutes legal advice, and this article is not intended to provide an exhaustive list of all provisions or requirements applicable to each jurisdiction. Advice on jurisdiction, as well as on tax and regulatory treatment, will vary between establishment structures. Specific advice should be sought prior to the establishment of a tokenisation platform.

In-depth 2024-112