Private Loans and Taxes

A loan granted by a private individual is an increasingly common way to provide financial assistance within a family and an opportunity to invest money advantageously. The interest calculated from such a loan constitutes income, therefore, it is important from a tax perspective. In this post, we will delve deeper into the subject and explain which taxes are incurred on a private loan.

What is a private loan?

Let’s start with what a private loan is. Normally, we associate a loan with money obtained from a bank, but in this case, it involves money from a private individual. Anyone with substantial wealth can grant a taxable loan – it is often used as assistance for family or friends who do not want to engage with a bank.

It is also an effective investment tool, as one can achieve a high return in the form of interest from the personal loan, which is why many people in Germany choose this option instead of other investments.

As with a traditional loan, a contract should be created that includes the amount, the exact repayment date, and the interest rate. Even if the loan is given to someone known, such a document is necessary – according to its provisions, we must pay tax on the interest of the private loan (Taxation of Interest on Private Loans). Below we describe when it is due and how much it is.

Tax on interest from personal loans – how much is it?

Let’s get to the details. If you decide to become a lender, you will earn profits in the form of interest. As with any income, tax must be paid here too. How much is it?

In Germany, income from taxable interest on private loans is taxed with a withholding tax of 25% plus a 5.5% solidarity surcharge and, in some cases, church tax. If we lend a small amount, resulting in an amount of less than 801 euros, no taxes are incurred.

Interest from a private loan in the tax return

As a private lender, you should remember that all taxable loans are important for tax purposes. It does not matter whether the borrower is a close acquaintance or found via a portal. All interest from a private loan (Taxation of Interest from Private Loans) must be declared in the annual statement to the tax authorities.

Interest from a private loan in the tax return should be indicated as ‘Income from capital assets’. Here, all other investment profits, such as gains from the sale of shares, interest from a savings account, dividends, or stakes in a company, should also be listed. It is worth using an app to handle the German tax, like Taxando, to quickly manage all the formalities.

Tax on a personal loan without interest – is such a loan possible?

If we want to grant a loan to our family or friends, our goal is to make the interest as low as possible or nonexistent. In such cases, we levy only a low interest rate or forgo profits entirely. In both cases, however, one can easily fall into a tax trap.

In such cases, the tax office may view this as a gift from the lender to the borrower and classify it as a donation, which may lead to the payment of the corresponding tax.

There should be no issue with the tax on a personal loan (Private Loan Taxes) if it is granted to the closest family (spouse, child, grandchild), as in Germany, there are high allowances for gifts to close relatives. Their amount depends on the degree of kinship – for siblings, for example, it is 20,000 euros.

Take, for example, a loan granted to a sister, on which we have waived interest. The tax office will scrutinize such an amount and apply a fictitious tax rate of 5.5% per annum. If it is an amount sufficient that the assumed rate exceeds 20,000 euros within ten years, we may be required to pay the gift tax.

Private taxed loans – online portals in Germany

Individuals with high incomes often choose to grant a private loan purely for profit purposes. It is often considered an alternative to investments that can yield a higher return compared to many solutions offered by banks. Special portals are used to offer such services, where we can list a proposal to grant a taxable loan.

Such portals are also often an attractive option for borrowers, as in many cases favorable conditions and a quick approval process for the loan are offered. It is an opportunity for people who, for various reasons, have difficulty obtaining a traditional loan from a bank.

For any private loan, a contract is, of course, concluded. Besides the amount, it should also include the date and amount of the calculated interest. It is important that the contract is precisely worded – this avoids disputes both with the borrower and the tax office.