Crowdfunding and Tax – what are the rules?
If you’re an innovator wanting to crowdfund a product, or even if you’ve just given money to a crowdfunding campaign, there’s something you might not have considered: tax.
Crowdfunding might seem like a quick and easy way to fund your dream project, but don’t let the hype fool you. Raising enough money takes time and effort, and if the campaign is successful you will probably have to pay tax on the money you receive – and charge VAT on the rewards you give.
Money raised through crowdfunding is income. If you are raising that money for profit, then you will have to pay income tax (for individuals, sole traders and partnerships) or corporation tax (for limited companies). If you are not raising it for profit – maybe you want to hold a block party on your street, or raise disaster relief money for earthquake victims – you will have to prove that you are not making a profit in order to avoid tax.
“Whether crowdfunding income is taxable to the recipient depends not on the type of financing, but on the purpose of financing,” explains Ståle Lorås, Partner at Norwegian auditing firm BDO.
“According to the Norwegian Taxation Act, income from business is liable to tax. It must therefore be determined whether the activity financed is part of a business, or whether the recipient is a tax-exempt institution. This involves undertaking a concrete assessment of the conditions in each individual case. If the conditions of a business are met, the income will be liable to tax.
“What type of activity is being financed through crowdfunding will be a decisive factor in determining tax liability. If the recipient is running a taxable economic activity, the funds raised for this purpose will be counted as taxable income.”
Skatteetaten, the Norwegian tax authority, has also written a helpful two-pager (in Norwegian) explaining how crowdfunded profit fits into existing tax rules.
In reward-based crowdfunding campaigners give donators rewards in exchange for pledged money. This is essentially pre-paying for a product or service. In the eyes of Norwegian tax law this is a sale, just as much as if you were exchanging goods directly – and even if the market value is less than the investment. Therefore, VAT must be collected on these products or services.
A t-shirt, a 3Doodler, or a dinner with the founders would all fall under the standard VAT rate of 25%. If the donation amount were 1000 NOK, for example, 200 NOK would be taken as VAT. A book, on the other hand, is a “zero-rated supply”, so no VAT is collected.
Remember too that VAT is not charged on purchases made from outside of Norway – so if 50% of your funds come from pledgers in the USA, that money is VAT-free. (But it’s still taxed as income.) In Norway, business must also be VAT registered if their annual turnover is above 50,000 NOK, or 140,000 NOK for non-profit organisations.
A note on equity crowdfunding
In the case of equity crowdfunding, investors fund start-ups or small businesses in exchange for partial ownership (shares). There is no tax charged on selling shares, because the money received is not counted income. This doesn’t mean equity crowdfunding is simple – as this list of possible pitfalls shows.
In a nutshell: if you are crowdfunding a commercial product or service in Norway, be prepared to deduct income tax and VAT from your earnings.
This article does not constitute tax advice. If you are crowdfunding a business, we recommend seeking assistance from a tax professional.
Image credit: The CrowdFunding Consultant