The Taxation of P2P Crowdlending

Introduction

New digital and international businesses present an increasing challenge for national tax authorities. What was once a domain restricted to large multinational corporations with diverse tax domiciles, including tax havens or very favorable jurisdictions, has become one of the main concerns for top tax inspectors. These issues are often met with limited success. On this post we will talk about The Taxation of P2P Crowdlending.

Challenges for Tax Authorities

Multinational Corporations vs. Local Businesses

It is much easier for tax inspectors to target a sole proprietor or a business with a physical location in a domestic market where they can be inspected or threatened with severe penalties or even criminal charges for negligence or mistakes. In contrast, going after the tax structures designed by top international tax firms for large corporations is far more complex, involving hundreds of thousands of hours, large teams of inspectors, and at least five years of petitions to supranational tax authorities.

For example, Apple Spain reported a profit of €12.5 million in 2023, while Apple Ireland reported over €7 billion (triple what was declared in 2020). This discrepancy arises because Spain accounts for the sale of cables and some extras, while phones and computer (Apple real business) are billed in Ireland. Is this fair? It’s unlikely that a local tax inspector will open an investigation into this matter and let the local baker off the hook for misreporting VAT.

Aside from discussions about the fairness or unfairness of tax regimes, it’s important to understand that topics like Bitcoin or P2P represent new challenges for tax authorities, tax advisors, and certainly for the end consumer.

New Challenges with Cryptocurrencies and Digital Services

Government Response to Cryptocurrencies

Governments are known to react very quickly to attempts to identify all users who invest and earn profits from cryptocurrencies. Many individuals, both young and not-so-young, with significant profits are constantly searching for ways to minimize their tax payments from this business.

The internet is filled with people asking how to avoid the increasing control governments want to implement over this new and lucrative market. In just a few years, it went from being dismissed as a niche hobby to a means of extracting substantial tax revenues from these investments. Many have even changed their tax residence due to the way cryptocurrencies are taxed in various countries, such as the significant number of Spaniards moving their tax residence to neighboring Portugal or even Dubai for tax reasons.

Changes in Reporting for Touristic Rental Platforms

Similarly, until recently, platforms like Airbnb or Booking.com did not report their users in each country. This has changed, and now even your annual tax draft includes details of the days your property was rented out through these platforms and the income earned. The same is happening with cryptocurrency trading platforms, which are increasingly required to report their users.

Tax Compliance for P2P Crowdlending

Regulated vs. Unregulated Platforms

Tax authorities are putting increasing pressure on tax compliance in the case of P2P Crowdlending. There are national regulated platforms where it’s straightforward to inform them that they need to report the users who used their service during the fiscal year. This information allows the tax authorities to easily determine the money you had invested and the profits you made.

However, complications arise when the P2P platform is unregulated or based in a country with less advanced tax enforcement or technological capabilities.

Understanding How P2P Platforms Operate

If you’re not familiar with how P2P platforms operate, it’s advisable to read our article, “P2P Platforms Beginner’s Guide.” Let’s consider several scenarios to illustrate the complexity of the issue:

Transferring Funds to an Unregulated Platform

Suppose we’re in a European country, Spain, and we transfer our savings from our Spanish bank to an unregulated P2P platform like Hive5 in Croatia. The platform will instruct us to deposit funds into a bank, usually in Croatia, so the platform can then transfer the money to our balance within the platform. Once the funds are in the platform, we invest in loans from various originators spread across Europe and earn returns from these loans, which we then reinvest in new loans repeatedly.

Reporting Requirements and Challenges

CRS and Bank Reporting

In Europe, financial institutions are linked to the CRS (Common Reporting Standard). What is CRS? It is a system for the automatic exchange of tax information between member countries, allowing tax authorities to periodically access tax information on all investments their taxpayers hold in foreign entities. In simpler terms, this means that regardless of whether your money is in Spain or Croatia, the tax agency could potentially know about it.

In Spain, you must report foreign account balances exceeding €50.000 at the end of the year or on average during the last quarter using Form 720. So, if you have €100.000 in February and March and then reduce it to €49.000 in October, November, and December, you would not need to submit Form 720. However, bank transfers exceeding €3.000 are also reported to the tax authorities by the banks, and it’s possible, albeit unlikely, that a pattern of suspiciously frequent transfers of, say, €2.500 each week could raise flags.

European entities communicate via the CRS, and the US has its FATCA (Foreign Account Tax Compliance Act), which does not interact with CRS. Information requests would require judicial requests to the IRS, which is complicated.

Handling Earnings and Withholdings

Regulated Platforms’ Reporting Obligations

Regulated platforms typically have an obligation to report their users’ earnings for tax purposes. However, unregulated platforms may not report to their national tax authority. Some platforms may even withhold taxes in advance for the following year’s tax payment, while others may withhold no taxes and leave the responsibility to the user to report their income.

Withholding Tax and Certificates

Some platforms automatically withhold a percentage for future taxes. In such cases, you will be asked to provide proof of your national tax residence and the double taxation treaty with their country.

For example, some Lithuanian platforms withhold 19% by default, but if you present your tax residence certificate from another European country with which Lithuania has a double taxation treaty (easily obtained from your national tax agency), the withholding is reduced to 2%. When you file your tax return in your country, if it is taxed at 19%, you can reduce the 2% already paid in Lithuania.

Reporting and Documenting Losses

If the investment platform has applied withholdings abroad, you can account for this in the double taxation section. In Spain, you would enter the earnings and the total amounts withheld in the section for “Deductions for International Double Taxation” on your tax return. Almost all platforms provide an annual tax summary showing your earned interest. It will depend on each user, the amounts involved, and their personal situation whether to report these foreign earnings annually or not. Of course, the legal approach is to include the earned interest as investment income.

If losses occur, such as defaults on loans or platform issues, proving these losses may be challenging. You would need to obtain a document certifying a certain and secure loss (e.g., bankruptcy document). Without such proof, claiming these losses can be difficult. In general, in the fiscal information provided by each platform, when a loss is declared, it will appear as “bad debt” or “uncollectible debt,” and you can then report that amount as “capital losses.”

Treatment of Cashbacks and Bonuses

Cashbacks or bonuses obtained should be included as capital gains on your tax return.

Country-Specific Reporting

Latvia and Lithuania

• Latvian Platforms: Mintos, Debitum, Twino, Viainvest – These platforms withhold 5% if you reside in Spain or another EU country, without requiring a tax residence certificate.
• Lithuanian Platforms: Crowdpear, Inrento – These platforms withhold a higher percentage, but you can present a tax residence certificate to benefit from a reduced withholding rate.

Spain’s Taxation on Crowdlending

In Spain, all interest earned from crowdlending is considered investment income. This includes interest from all crowdlending platforms and other sources such as bank accounts. Therefore, in the “Investment Income” section of the tax return, you must include not only the interest earned from crowdlending platforms but also interest from other sources.

Summary of The Taxation of P2P Crowdlending

Consider all earned interest, late fees, cashbacks, and bonuses as taxable income. Check with your tax authority regarding the amount of money allowed to be sent abroad for investment and how it affects your tax obligations. Seek advice on double taxation treaties, whether the platform will withhold a percentage of earnings for tax authorities, and if not, request the annual report to obtain the summary and certification of such income. Evaluate how easy or difficult it is for your country to track these investments and how you transfer money out of the country and back.

Be aware that 99% of tax advisors may be unfamiliar with the specifics of taxing P2P crowdlending earnings. Therefore, you will need to inform yourself about your country’s relevant legislation and decide whether it is feasible for your tax authority to track these earnings and whether to declare them, especially if the invested amounts were small and the profits minimal. It may be more laborious or costly to explain these concepts to a tax advisor unfamiliar with crowdlending investments.