Taxes in Aragon Association, Switzerland

Dear Aragon Community

In my function as an external accountant and tax advisor of Aragon Association (“AA”) and Aragon Labs (“AL”), I would like to draw the Community’s attention to certain tax implications if the funds of Aragon Association are transferred to the Network DAO.

Tax implications:

AA is subject to Swiss laws on taxes, VAT, and social insurances and has to fulfil its current legal and tax obligations in Switzerland.

Currently, the AA has a very favourable tax ruling in place with an effective tax rate of just over 5%, computed based on expenditure rather than revenue or capital gains… For example, if the AA‘s yearly spending totals CHF 2 million, 5% of that is allocated as profit and is taxed accordingly. The resulting total tax burden for CHF 2 million is approximately CHF 26’800 instead of a potential CHF 260’000 without the tax ruling.

The tax ruling has one condition: the funds have to be spent in relation to the initial by-laws and project cause. Should the AA be dissolved or liquidated, the entire remaining assets are taxed as profit at the standard rate of 11%, and not the 5% agreed in the tax ruling. In other words, if you transfer CHF 200 Mio to a DAO outside the AA’s control, the AA will likely be deemed as “de-facto liquidated” and the entire transaction may be subject to taxable profit. Based on the above example, the resulting tax liability for the AA would be approximately CHF 19.5 million. In contrast, if the AA continues to spend the funds in the current manner and under the control of the AA, the total tax burden would result in CHF 1.16 million.

Up until now, the AA has been funding the Network DAO in small instalments of grants. Such grants have been accepted under the tax ruling and are considered normal spending, in part because the Network DAO is still supervised by the Swiss Association and in part because the majority of the funds still remain in the AA.

The tax department may consider a one-off transfer of all or most of the AA’s assets as the equivalent of the AA being de-facto liquidated. Furthermore, such a transaction may not be considered “spending” according to the by-laws. Some important considerations are to what extent the AA may be able to block use of funds that go against its purpose (perhaps by the implementation of veto right on AN DAO expenditure) as well what immutable provisions the charter may include that prohibit use of funds that go against the AA’s cause. If there are no veto rights, and no control mechanisms to prevent funds being used for activities other than the purpose set out in the bylaws, there is a high risk the funds would not be considered “spending” and would instead be taxed at the effective rate of 11%.

We are currently in close conversations with the tax department to see whether we can make them understand/accept that transferring funds to a DAO does not mean the end of the AA - even if it would continue to operate, without significant funds.

Solutions/Options:

I fully support and understand the need for more involvement of the Aragon community. Should we be unable to find a workable solution with the Swiss tax authorities, there is this alternative proposal for the AA, or a new Swiss Association to be formed and fully controlled by the DAO.

From my perspective, I think the AN DAO should probably have a legal wrapper (the AA) so that:

  • It is capable of complying with taxation requirements - without a legal wrapper, participants may have to pay taxes on a proportion of the DAO’s income and assets, even if they are not able to access the funds.
  • It provides limited liability to DAO participants for the actions of the DAO. Without a legal entity, participants may be individually held liable for anything the DAO as a whole does.
  • It is capable of entering into contracts with other “real world” entities

The Swiss government has created a great environment over the last 4-5 years for crypto projects in Switzerland, not just on the legal side but publishing very clear guidelines for their taxation and VAT and even allowing payments in crypto for taxes. Unlike in other countries, we can talk directly to our tax and VAT departments and find solutions together.

I have lived abroad myself for many years but came back to Switzerland permanently since I realised that Switzerland not just provides a very stable and safe environment for companies and individuals but actually lets me as a person vote every quarter on any relevant subject of our country.

A DAO wrapped in a Swiss Association provides the same: stability, transparency and the ability as a member to vote on any relevant subject!

Gabriela Mäder

5 Likes