Crowdfunding (funding from a large number of people) is the collective effort of individuals to support efforts initiated by other people or organisations. This is typically done via the internet. By way of social media, online platforms provide start ups with innovative ideas the ability to raise funds in order to accomplish their goals.

Crowdfunding is a major form of Crowdsourcing, a term first used in June 2006 by Jeff Howe in an article published in the WIRED magazine entitled “The Rise of Crowdsourcing”. Crowdsourcing refers to outsourcing tasks to a large group of people or community (mass) via an open invitation. The tasks are not assigned to selected outsourcers, but to a crowd. In the case of Crowdfunding, the crowd assumes the task of funding.

Following the 2008 financial crisis, access to funding for new business plans was significantly curtailed. Funds from the quantitative easing programmes in the USA and the EU (the ECB followed in Fed’s footsteps, but had fallen behind due to Germany’s objections) were used by credit institutions in order to strengthen their capital structure on the one hand and to finance the actual economy on the other. At the same time, large enterprises and organisations on both side of the Atlantic essentially benefited for the zero interest rates moving forward with debt restructuring alone. This opened a window of opportunity for Crowdsourcing to become a new kind of social action.

How does it work?

The creator/entrepreneur presents a campaign on a platform where he describes:

– his idea,

– the amount needed for its realisation,

– the “reward” that he will offer his supporters (anything from company shares to small gifts or products) and

– sets a time limit within which the funds need to be raised.

This fundraising can take the following forms:

Donation-based Crowdfunding, mainly refers to fundraising for social causes. The investor does not directly benefit from the donation, but indirectly benefits from the implementation of the project.

Reward-based Crowdfunding. This model is based on a barter system, since the project being carried out results in the production of a product/service. Depending on the investment, investors receive various versions of the product or a reward which may come in the form of a memento, a meeting with the actors of a movie production, etc.

Loan-based Crowdfunding. Similar to bank loans.

Equity-based Crowdfunding. The participant becomes an investor.

In Greece, the Crowdfunding regulatory framework is covered by the law that refers to shares listed for trading on the Stock Exchange, namely Law 3401/2005 “Information Bulletin on the public bid of securities and their listing for trading” and Law 3606/2007 “Financial instrument markets and other provisions”. Relevant amendments were made with articles 23 and 24 of Law 4416/2016.

From a taxation perspective, however, treatment differs depending on the form of the fundraising. This fact alone constitutes a major challenge. In an effort to combine the nature of the transaction with current tax provisions, we distinguish the following situations:

  • Donation-based Crowdfunding: The transaction could be characterised as a donation under the provisions of Law 2961/2001 (Code on taxation of inheritance, gifts inter vivos and lottery gains), where according to article 44(2), tax is calculated by proportionally applying article 29 of the same law (40% tax rate for persons that come under category C).
  • Reward-based Crowdfunding: This case entails the supply of goods, thus the Value Added Tax Code (Law 2859/2000) is accordingly applied with articles 5, 7 (supply of goods, self-supply and small-value gifts) and 13(6) (distance sales) as well as Law 4172/2013 (Tax Income Code).
  • Loan-based Crowdfunding: The provisions of the Stamp Duty Code apply in this case. Lending is done on an interest-free basis and based on existing provisions there is no evidence of a minimum interest rate (relevant provision does not exist in the current Income Tax Code).
  • Equity-based Crowdfunding: Investors acquire a share/corporate holding with all the rights and obligations deriving from these. Capital concentration tax of 1% is imposed (article 18 Law 1676/1986), given that most times these payments are made to increase capital. For Greek tax residents, the provision of article 32 of Law 4172/2013 (Asset acquisition expenses) shall also apply.

To date, Greek Tax authorities have not addressed this issue at its core. In the General Secretariat for Public Revenue’s (now Independent Authority for Public Revenue) reply under no. DEEF A 1004859 EX 2016/14.1.2016 (ΔΕΕΦ Α 1004859 ΕΞ 2016/14.1.2016), the Tax Administration essentially reproduced the guidelines that were prepared during the 102nd VAT Committee Meeting. In our opinion, Crowdfunding should be addressed with the enactment of specific legal provisions that will give incentives for the growth of this institution in Greece in a truly growth-conducive tax system.

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