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 Source: own research – may contain errors or be outdated.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%.
If you live in Latvia and invest on Mintos, the Latvian tax department might consider you a self-employed trader (23% tax rate) rather than a private investor.
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)Â 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.
This article does not provide tax advice