Crowdlending in Spain: current situation, legislation and tax regime

The financial system is undergoing unprecedented decentralization. In recent years, myriad alternative financing formulas have emerged that advocate taking some of the power away from the banks and handing it over to the people. And this is the reason why methods such as crowdlending are gaining ground in Spain and around the world.

To understand the magnitude of this phenomenon, it is essential to understand the advantages of this liberalization for all actors involved in the financial ecosystem. Increasing the number of existing solutions translates into increasing the freedom of decision enjoyed by investors and companies.

At the end of the day, if the total number of financing alternatives is very limited, the entities that monopolize them will be able to divide up the market and impose their interests as they wish, to the detriment of both savers and businesses to design their investment strategy.

The former will only be able to allocate their capital to projects that receive the banks’ approval, and their ability to negotiate the operation conditions will be practically nil. As a result, the latter will see their range of financing possibilities reduced. On the other hand, suppose the banks do not approve their proposal. In that case, they will not be able to obtain the necessary resources to land and establish themselves in the market, being forced, on some occasions, to resort to less reliable mechanisms.

The arrival of alternative financing

It is in this context that alternative financing platforms were born. They all share a common goal: to democratize the world of finance and open the door to all kinds of people and projects.

These mechanisms are characterized by incorporating the ethical component, traditionally forgotten by conventional banks. Thus, the initiatives that require financing must demonstrate their economic viability and generate a positive impact on society or the environment to attract people interested in ethical investment.

Crowdlending is one such method. Through this system, different savers finance a certain company through loans, so it does not have to depend on banks.

When the company settles the debt with the investors, it returns the money originally lent and includes the compensation, which will be determined by the interest previously agreed in the contract. Before signing, both parties can pool their needs to create a formula that suits their requirements. Thus, they jointly define aspects such as the monetary amount, the interest rate of the transaction and the repayment deadline.

Thanks to this high degree of customization, crowdlending in Spain was not limited to being a temporary trend but appeared with a vocation for permanence.

The current situation of crowdlending in Spain

Initially, most of the platforms offering crowdlending services in Spain were foreign. But with the passing of the years and the progressive acceptance of these mechanisms by society, the first platforms created exclusively with national capital were born. This is undoubtedly a clear sign of the growing interest of savers and companies in this means of financing.

The consulting firm Universo Crowdfunding, the University of the Republic of Uruguay and the University of Jaén have been making periodic radiography of the state of this sector since 2016. The Annual Report on Crowdfunding in Spain is the fruit of the collaboration between the three institutions.

Comparing the different editions with each other allows us to obtain a very reliable perspective on the evolution of crowdlending in Spain and the other types of crowdfunding (the alternative financing model from which crowdlending is derived). In 2018, crowdlending was the majority sector, with an annual collection of close to €70 million.

However, the irruption of the pandemic and the emergence of new formulas substantially slowed its growth. Loans are the third most popular alternative, with a 16.2% market share and an annual collection of 35 million euros, behind real estate crowdfunding and investment crowdfunding.

What law regulates crowdlending in Spain?

Despite the short history of crowdlending in Spain, the legislation directly impacts this issue. The different modalities are grouped under the umbrella of participatory financing platforms, whose legal regime appears detailed in Title V of Law 5/2015, April 27, on the promotion of business financing.

The law narrows the scope of action of these platforms, which not only engage in selecting and publishing participatory financing projects but also establish the communication channel that facilitates contracting. To operate, they must receive authorization from the National Securities Market Commission and comply with the principles of neutrality, transparency and diligence, always considering the interests of both parties.

Different articles regulate the different infractions, as well as the penalties derived from them. In addition, a series of different measures are established to protect small savers.

To this end, a difference is made between accredited investors (those with more resources and who have no investment limit) and non-accredited investors (those who are not professionally engaged in investment and who have a limit of 3,000 euros per project and 10,000 euros in the last twelve months).

The law also seeks to reduce the risk of organizations’ inability to repay the debt and restricts the amount of money they can raise through these platforms. If they target ordinary individuals, they will only be able to raise 2 million euros. If they target accredited investors, this figure rises to 5 million.

Taxation at a glance

It is impossible to understand the state of crowdlending in Spain without knowing its tax regime. Article 25 of Law 35/2006, of November 28, on Personal Income Tax and partially amending the laws on Corporate Income Tax, Non-Resident Income Tax and Wealth Tax regulate the taxation of interest derived from crowdlending operations, which would fall into the category of income from movable capital, just like shares in listed firms or interest on long-term deposits in banks.

When the profit is lower than 6,000 euros, the tax rate is 19%. If the profit is between 6,000 and 50,000 euros, this rises to 21 %. Finally, if the profit is higher than 50,000 euros, a tax rate of 23 % is applied, thus creating a progressive system.

Generally, most platforms of Spanish origin withhold this tax and transfer it directly to the Treasury. However, international platforms do not usually make this withholding: the investor receives the gross interest and is therefore obliged to inform the Treasury. In any case, it is essential to check the working method of the platform in question to avoid any incident in the future.

As with any investment, there is a certain level of risk, and the possibility of facing losses will always be present. However, these losses can be used to save, paying taxes only on the real profits. How? By offsetting losses and capital gains in the income tax return. If the incomes are of the same nature, the investor can subtract his losses from the total benefits and will only have to pay tax on the interest of the resulting amount.

Over the last few years, crowdlending in Spain has gained major prominence. Its adoption means endless advantages for both savers and businesses, which are no longer dependent on banks and can invest their assets or borrow more easily. And the future holds even more growth for these alternative financing methods, which still have a lot to offer.

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