One important aspect for p2p lending investors is tax. In this blog whenever I talked about yields achieved, it is usually pre-tax yield. That is because taxation varies significantly from country to country. In most cases the place of residency of the investor determines the tax regime applicable. There are a few exceptions, e.g. on very few marketplaces withholding taxes are applied.
But I wanted to give a viusal overview on how different tax rates are for p2p lending investors, depending on where they live in Europe. Therefore I created for following map.
For overview purposes only. Source: own research – may contain errors or be outdated. Please note that this is a simplification and will not cover many cases. Do not make any decisions based on this, but rather consult a qualified tax advisor
In the countries colored in black the income tax rate is applied on interest earned on p2p lending investments. That means the individual rate of taxation depends on the other and overall income of the investor. For example in the UK the tax bands are 20%, 40% and 45% dependent on overall income. In Ireland tax bands are 20% and 40%.
But in most other countries there is a fixed rate applicable for interest earned on p2p lending. Tax free allowance up to a certain amount may apply. For example in Germany taxation (Kapitalertragssteuer) is 26.375% (a little higher if church tax applies).
Taxation is complex. Futher important points are whether defaults and fees can be offseted against interests earned. Also capital gains (e.g. from selling loans with a premium on a secondary market) may be taxed different than income.
Advantageous tax rules
There are many special tax rules and tax breaks. Consult a qualified tax advisor for information on your situation. Here are just some interesting examples.
UK: UK residents can invest through so called ISA products. There is a special IFISA (Innovate Finance ISA) which can be used to invest up to 20,000 GBP tax-free on peer to peer marketplaces. More information and an IFISA comparison is here. The interesting point is that the allowance is available per year. That means an investor using it in 10 consecutive years can invest 200,000 GBP tax-free into p2p lending.
Estonia: Many Estonians lend through a limited company (OÜ) they have set up. The advantage there is , that as long as the earnings stay in the company they are not taxed. Only at the time the profits are paid out from the company to the investor they are taxed at 20%. This allows investors to postpone the taxation for a long time.
Netherlands: The Netherlands are the only country in Europe where the tax is not based on actual p2p lending earnings, but rather fictual earnings. Wait. What? The tax system is actually a wealth tax, and the tax declaration is not based on income but wealth. The tax authority then assumes you earned a fictual income of 4% on your wealth. Tax rates used to be 30% on that (so 1.2% on your wealth; since 2017 it is now 0.581 to 1.68% dependant on amount of wealth). Now if you actually earned 10% ROI with your p2p lending your effective tax rate calculated on that would be 12% (30%*4%/10%). That’s what I used for simplification purposes in the map.
Portugal: In Portugal the rate is 28%. But if a foreign resident moves to Portugal and earns interest only from p2p lending market places abroad, he can profit from a 0% tax rate on these (providing the originating country does not tax the interest) for 10 years. Mark explains his personal experiences with this on obviousinvestor.com. There are non-resident/non-domiciled rules in other Euopean countries but they usually sound more complicated/restrictive.
Hint to platforms: It may be efficient to target countries in your marketing that have a high GDP but also a low or medium tax rate on p2p earnings.
P2P-Banking launches a new IFISA database, that enables investors an easy comparison of offers by IFISA providers. UK taxpayers can invest up to 20,000 GBP per year tax-free in ISAs. This amount is per tax year, so a person could invest 20,000 GBP this tax year and invest 20,000 GBP in a different ISA next year. The Innovative Finance ISA, short IFISA, was introduced in 2016 with most offers becoming approved by HRMC only in the 2017/2018 tax year.
The new database of IFISA offers allows speedy selection and sorting to review IFISA products by different providers and then links to the provider’s website for in detail information. Investors can filter by interest rate, term, loan type, minimum investment amount, possibility of transfers in and out, flexible IFISA, bonus & cashback promotions and several other criteria. The comparison focusses on IFISAs by p2p lending marketplaces but also lists IFISAs investing in crowd bonds and other investment types. Currently more than 15 IFISA providers are listed and P2P-Banking will list new offers as they are approved by HRMC and launched in order to help investors get the best IFISA rates that match their investment strategy and risk appetite.
Several companies have reported huge demand in their new IFISA offers. Lending Works reported a huge spike in investor deposits after launch and last week the consumer loans marketplace said, it has recorded £8.8m of subscriptions into its IFISA in the first 3 months with 815 investors lending. CapitalRise has stated earlier this month that the IFISA product raised 900,000 GBP in the first 4 weeks. Crowd2Fund, said that 95 per cent of its investments are now made through the tax free wrapper. CEO Chris Hancock said the platform is experiencing 50 per cent month-on-month growth and is expecting to originate 2 million GBP in loans in April. ‘Last week, 58 IFISAs were opened from 115 investor registrations,’ he said. ‘I think the IFISA market has grown three-fold in terms of investor demand over the past year.’
More p2p lending marketplaces have gained FCA approval recently and are preparing to go live with IFISA offers in the next weeks. Readers of P2P-Banking can subscribe to the free notification service and receive an email whenever the database is updated and a new provider is added.
Lending Works CEO Matthew Powells reported an influx of more than 500K GBP deposits within 3 hours after launching the Lending Works Innovative Finance ISA (IFISA). Lending Works’ IFISA product offers 4% (up to 3 years) or 4.7% (up to 5 years term) tax-free for investments on the p2p lending marketplace. However Lending Works, anticipating the huge demand, has launched the offer with an upper ceiling: ‘We’re anticipating a significant spike in lending volumes as a result of the new ISA. Because we want to match your money swiftly at all times, we will only be accepting ISA monies from lenders in fixed, periodic tranches totalling £1 million at a time. Once this limit is reached, we will then temporarily be closing this window of opportunity until further notice.’ as stated on the company website. It is expected that Lending Works might lower rates after this threshold is met.
Investors can draw down either interest, or interest and capital over the term of the loan, or reinvest the interest. A recent survey of Lending Works’ existing investors found that 88% plan to open an IFISA, with around a third expecting to invest between 10,000 GBP and the maximum threshold of 15,240 GBP of their annual ISA allowance into the IFISA before the end of the tax year in April. In the next tax year the allowance will rise to 20,000 GBP. Continue reading →
This is a guest post by Dutch lawyer Coen Barneveld Binkhuysen (see full bio at the end of the article)
Crowdfunding is growing exponentially in the Netherlands. Although the Dutch market has not yet reached the astronomical levels of the United States and the United Kingdom, many people have heard about the phenomenon and are intrigued by this potential alternative investment opportunity. While the Dutch market speaks a lot about crowdfunding, it is less familiar with the term p2p-lending (it is commonly available though). As this article covers investments in loans, convertible subordinated loans and equity, I will use the general term crowdfunding instead of p2p-lending.
In the first 6 months of 2015, almost 50 million Euro was raised via crowdfunding, which is double the amount raised in 2014. There are over 80 crowdfunding platforms active in the Netherlands, which makes it difficult for potential investors to gain an overview of the viable available investment opportunities. This article provides a general overview of the most important platforms active in the Dutch market. Furthermore, I will discuss some relevant topics in relation to crowdfunding, such as: diversification options, costs, default risks, cash flow, types of investment and the added value of a properly managed crowdfunding platform.
Overview investment options
In general, crowdfunding platforms in the Netherlands offer the option to invest in loans, subordinated convertible loans and equity (besides donations and the purchase of products). Each of these different investment options has benefits and drawbacks in terms of cash flow, risk and the potential upside can vary significantly:
Loans provide a direct cash flow to the investor as loans are usually repaid in monthly instalments. Loans only have a limited potential upside, maximized at the offered interest rate. Due to the monthly repayments, the risk decreases every month. Most crowdfunding platforms determine the interest rate based on the envisaged risk. As far as I am aware, there are no platforms active in the Netherlands that provide the option to “bid” on loans in auctions.
Convertible subordinated loans (also called convertibles) are considered to entail more risk than normal loans as convertibles are subordinated to (normal) loans and other claims. Investors generally expect a higher return in exchange for a higher risk. Instead of offering a higher interest rate, companies issuing convertibles via crowdfunding offer the option to convert these loans into certificates of shares. The option to convert may be restricted by certain conditions such as (i) a specific period in which conversion must take place and/or (ii) the condition that a sophisticated investor invests at least amount “X” during the term of the loan. For an investor it is important to identify any conversion conditions that may apply. If the loan is not converted into certificates of shares during its term, the investor will receive the principal plus interest payments at the end of the term of the loan. These investments might not be interesting for investors looking for a steady cash flow, but they can be interesting for those who want to have a shot at a serious return.
Equity is normally being offered in the form of certificates of shares (equal to the convertibles described above). Again, investing in equity does not create a steady cash flow for the investor. The terms and conditions related to the certificates of shares may (and normally will) restrict the option to sell them. Therefore, investors are expected to wait for the moment the entire company is being sold to an investor, which can take a long time. Investing in equity might only be interesting for investors looking for long-term investments. Then again, these investments do have the largest potential upside as the investor will profit from every increase in value once the company is being sold.
Each investor takes, or at least should take, the risk of default into account, especially when investing in high-risk companies such as start-ups. Business cases of start-ups have not yet been properly tested and most do not, or hardly have, any financial buffers. Should the financed company go bankrupt, practice shows that only in rare cases (only part of) the loan can be recovered. Normally, preferred creditors such as banks and the tax authorities will receive the benefit of all assets left in the company and there is nothing left for others. Some platforms try to reduce the risk by requesting a personal guarantee of the entrepreneur, but this is of little use if the person does not have any assets.
The actual difference between investments in loans, convertibles and equity from a risk perspective is small. Investors having certificates of shares have a larger potential upside than the holders of loans. One could say that investors almost bear the same risk, but with different potential upsides. In my opinion the most important reasons to choose for normal loans are the fixed term and monthly repayments. If you are not in a hurry to make a profit and are going for the highest potential return, convertibles and equity might be a more interesting option.
Overview largest platforms in the Netherlands
After selecting the preferred investment instrument, it is important to select one or more of the available crowdfunding platforms. Without aiming to be complete, I list the largest and most active platforms active in the Netherlands below:
Geldvoorelkaar.nl is the national market leader and funded over 825 projects, with a total sum of over 66,000,000 Euro. The platform focusses on p2p-lending and only provides investors the opportunity to invest in loans. Interest rates range from 4% to 9% depending on the risk score determined by Geldvoorelkaar.nl. All loans are being repaid in monthly instalments as of the first month. By investing in projects via this platform, it is fairly easy to generate a decent cash flow. Up to now, 3.5% of my investments on the platform have defaulted. As the principal of one of the defaulted projects was almost fully paid back, my average ROI still accounts for about 6.5% per year. The other defaulted project was probably a case of bankruptcy fraud, which I expect to happen more often in the future. The platform opens several dozen new projects every week, which creates sufficient opportunities to diversify your portfolio and reinvest your money. An investor must pay a fee equal to 0.3% * loan duration (in years) * invested amount (which amount will be refunded if the project defaults).
Oneplanetcrowd claims to be Europe’s leading sustainable crowdfunding platform. Since launching in 2012 it raised over € 6 million in funding for more than 100 projects. Oneplanetcrowd operates in Germany and the Netherlands and is planning to open in other European countries soon. It provides investors the option to invest in loans and convertibles (apart from donations and presale options) and offers some of the most interesting investment opportunities, such as Snappcar and Wakawaka Power. Various projects offer the opportunity to co-invest with sophisticated venture capital firms as these firms invest simultaneously with the crowdfunding campaign. In my opinion, this is a huge advantage for investors as VCs tend to do a thorough due diligence before choosing to invest. The platform only allows companies with a sustainable philosophy to start a campaign on the platform. Their goal is to provide high quality investments with a decent return to investors. Although this is a good niche market, the strategy makes diversification opportunities fairly difficult. Investors do not pay a fee on Oneplanetcrowd.
KapitaalOpMaatand Collin Crowdfund are some of the main competitors of Geldvoorelkaar.nl as these platforms focus solely on loans with loan periods ranging from 6 up to 120 months and interest rates of 5.5% up to 9% depending on the calculated risk. Almost 6.5 million Euro and 13 million Euro have been funded via these platforms, respectively. Investors on KapitaalOpMaat pay a one-time transaction fee of 0.9% and a yearly fee of 0.85% on Collin Crowdfunding. Both platforms provide discounts to investors investing more than certain thresholds.
Bondorais a European platform offering the opportunity to invest in loans on a European level. Although this is by far the most sophisticated (international) platform available to Dutch investors, its presence is fairly unknown to most Dutch investors. Already more than 35 million Euro has been financed via Bondora. Investors are allowed to choose their own investments on the primary market, but most loans are filled in advance by a bot. Therefore, it will be necessary to invest automatically via the provided bot in order to obtain sufficient loans. This enables the investor to invest in literally thousands of loans differing in purpose, country and risk. All loans are repaid in monthly instalments on a virtual account. Bondora also offers the option to purchase/sell investments to other investors on its secondary market (with a premium/discount) against a fee of 1.5%. Investors do not pay any fees on the primary market. Although Bondora claims an average ROI of 18.75%, many investors complain about the large number of defaults. As the minimum investment is only 5 Euro, the threshold is low.
Symbid is one of the established Dutch crowdfunding platforms and focuses on equity (certificates of shares) and loans. Although Symbid seems to suggest that already more than 300 million Euro has been invested via their crowdfunding platform, the actual amount funded by the crowd is closer to 6 million Euro. One of the advantages of Symbid is that it offers the option to sell your equity to other investors on the platform. Continue reading →
This is an interview with Austrian investor Bernd R. about the experiences he made when he created a company in Estonia to benefit from the advantages that investing as business on Bondora brings. Note that these are his personal experiences and should not be construed to be investment or tax advice. The circumstances for other investors will be different and investors should seek tax advice by qualified and certified tax advisors.
How did you get the idea to setup a company in Estonia for your Bondora investments?
I read a lot about Estonia – its business friendly environment, simple tax system, huge start-up culture and the efforts to make administration processes available online.
Setting up an investment vehicle in Estonia would allow me to combine an uncomplicated taxation system with the advantages of a legal entity and all that at low costs.
What are the main advantages when investing as a company rather than an individual on Bondora?
There are several advantages.
The corporate tax rate in Estonia is 0%. Only dividends are taxed with 20%. This means that your retained profits will generate additional profit. Double taxation agreements with your home country protect you from being taxed twice and usually limit the total taxation to the tax rate for dividends of your country of residence.
In Austria interest income of private loans is treated in a different way than regular interest income (e.g. from a bank saving account). Interest income of classic bank saving product are taxed with a 25% flat rate, “private loans” fall under progressive taxation. On-top income of a full-time employee is easily taxed with 43% till 50%. So depending on the individual situation the tax savings can be up to 25%.
Provisions for bad debts or write-offs reduce the taxation basis.
Profits and Losses of different activities can be consolidated, e.g. losses generated with stock trading can be consolidated with your Bondora interest earnings and reduce the taxation basis.
How does the tax situation improve in your specific case?
I reduced the tax rate by 25% compared to my individual tax rate.
In addition I will generate more profit in absolute numbers due to untaxed retained earnings invested and at the same time reduce the taxation basis with bad debt provisions. The impact of these 2 factors depend on the future default- and interest rate of my Bondora portfolio.
To setup the Estonian OÜ you used a company formation service. Did that require you to travel to Estonia?
P2P lending service Lending Club, today announced the availability of the first Self-Directed Individual Retirement Account to enable investments in peer lending. EntrustCAMA, part of the Entrust Group, serves as the administrator for these accounts.
This new Self-Directed IRA investment choice gives individuals the ability to build a portfolio of Lending Club notes and hold that portfolio in a tax-free or tax-deferred account. To meet the Federal deadline for this tax season, applications must be completed online, printed and postmarked before April 15, 2009. The account application is available at https://www.lendingclub.com/sdIRA/registerIRA.action
Key benefits stated:
Potential for high returns. Choose from a diversified group of hundreds of qualified borrowers.
Tax advantages. Investments in a Self-Directed IRA can grow tax deferred until retirement age.
Flexibility. Select the type of IRA which is right for you: Individuals: Traditional or Roth Small businesses: SIMPLE or SEP Fund the IRA directly with a check or an existing account (IRA or 401K) to transfer or rollover.
A Diversified Retirement Portfolio. This Self-Directed IRA gives your portfolio access to Lending Club Notes, going beyond traditional stocks, bonds and mutual funds.
No account opening fees
One flat 250 US$ annual account maintenance fee starting in 2010 when you open an account before April 15, 2009