Crowdfunding, a new form of financing
Crowdfunding, a new form of financing
Ever since the banking crisis the financing of new initiatives has become more difficult. Through crowdfunding, an alternative form of financing, private parties, charities and companies can collect the funds needed for the most diverse of purposes.
What is crowdfunding?
Crowdfunding is a form of financing in which the ‘crowd’ contributes a part in achieving the goal of a certain party. Crowdfunding means investment by many. Online crowdfunding platforms bring, mostly private, investors and those looking for funding together so specific projects can be realised. Crowdfunding is used for both commercial and social goals. A writer can obtain enough money to write his new novel, a movie production can be realised or a starting entrepreneur can start his own restaurant.
Often used crowdfunding platforms are:
- www.kickstarter.com (miscellaneous).
Different kinds of crowdfunding
Financing through crowdfunding is possible in different ways. The ways differ in the manner that the investor is rewarded for his investment.
With the loan capital the investor grants a loan to the party looking for funding. The purpose is that the party looking for money pays back this amount at the end of the term and the investors receive an annual payment as interest. The height of the interest is dependent of the period of the loan and the creditworthiness of the project of the borrower.
By participating in the shareholder’s capital of a project or company, the investor receive one or more shares in the shareholder’s capital of the enterprise. The investor can now, through control or distribution of dividend be compensated for his financing. The investor actually gets a part of the enterprise.
Charities are usually realised by donations. This means that the investor does not receive a return compensation. Often the amount that the investor grants is only collected when the totally needed financial amount is achieved. When, eventually, it appears that insufficient capital has been acquired, the donation will not be collected. In this manner, the investor is protected.
A starting entrepreneur can sell products by means of crowdfunding, before the production process has started,. Through this advance payment, sufficient funds are collected for the launch of a new product or service. Investors pay for the necessary production process. As a return compensation they will be the first to receive the product or granted a higher discount. This form of crowdfunding is generally used for the launch of new gadgets or services.
The definition of crowdfunding is not known in the fiscal world, therefore no specific regulation applies. The fiscal consequences must be looked at by both the receiving –and paying party. Assuming who investors that finance through crowdfunding are mostly private investors, the fiscal consequences are only discussed from their perspective. However, it is also possible that an enterprise or LLC finances through crowdfunding.
A private party that lends money through crowdfunding is taxable for that loan in box 3 of the income tax. In this box the income from savings and investments is taxed. Not the compensation of the loan (the received interest) is taxed but, a fictitious interest of 4% is taxed. The tax rate in box 3 is 30%, which makes the tax burden in box 3 1.2% (4% x 30%). Besides that, a tax-free capital of €21.139 (2013) applies. Example: suppose you have made your entire savings, worth €100.000 available through the means of a loan with a term of 3 years and a total interest of 15%. The interest you will receive each year is therefore 5%. This actual interest is not relevant. What is, is the fictitious interest. The tax that is due in regard to the loan of the year 2013 is (€100,000 - €21.139) x 4% x 30% = €946,33. A fictitious interest is used in box 3 of the income tax. The consequence of which is that an possible loss on the loan is not deductible. For the enterprise or LLC that receives the loan, the paid interest is, in most cases, tax deductible.
Private parties that participate in the shareholder’s capital of a company must be divided into two groups. Private parties with a stake of less than 5% and private parties with a stake of 5% or more are treated differently in the income tax concerning the levy. When there is a stake of less than 5% the relevant shares are included in the box 3 capital. In this case the same regulations apply as in the example above. A private party with a stake of 5% or more in a company, also known as significant participation, is not included in box 3 but in box 2 of the income tax levy. In this box, the significant participation is taxed, consisting of received dividends and proceeds of disposal. This income is taxed with a rate of 25%. For the year 2014 it has been agreed to lower the rate, as an exception, to 22%. For the LLC the distributed payments, the dividends, are not deductible. Usually the LLC does have to pay dividend taxes. The applicable rate for which is 15%. The dividend tax is deductible with the owed income tax for the private party.
When someone donates money, nothing is expected in return. The donation is usually not deductible. However, this is different when someone makes a one-time donation to a charity or enterprise with an ANBI-status. In these cases the donation is deductible from the income in box 1 of the income tax. In such, the government partly pays for the donation. For more information concerning the ANBI-status we direct you to this page and ‘associations and the VAT-obligation’. For the deductibility of the donation there is a minimum and maximum amount. The total of qualified donations are only deductible if they are minimal 1% of the collected income annually up to a maximum of 10% of the collected income. Of course it does need to be proven that the donation has been done through the means of a receipt or bank statement. Receiving a donation is taxable. The rate against which the donation is regarded in the levy is dependent of the amount of the donation and the relation between the benefactor and the beneficiary. There is an exemption, which is dependent of the relation between the benefactor and the beneficiary. The exemption can be used to avoid gift taxation. Besides that, enterprises with an ANBI-status can receive tax free donations.
For the private investor de advance payment of a product has no fiscal consequences. For the seller, however, this does have fiscal consequences. Crowdfunding is used to sell products prior to the production process. For the enterprise that is selling, this revenue is considered to be generated turnover. The enterprise owes taxes on the remaining profit after deduction of the deductible expenses. The profit is either taxed with the progressive rate of box 1 of the income tax or taxed with the 20% or 25% of the corporation tax. In addition VAT needs to be paid over the advance payment. For this VAT the usual rate of 21% applies. It is however, also possible that the lower rate of 0% or 6% applies or that the product is exempt from the income tax. Possible refund of VAT can be deducted from this, except in the case of exempt property.
Risks of crowdfunding
Finance through the means of crowdfunding is not entirely without risk. Investors must prior to financing check whether or not they have sufficient information regarding the party looking for funding and the related project. It is important to know if the crowdfunding platform and the party looking for funding can realise the set expectations. Besides the risk of defaulters, identity fraud, the use of unreliable information concerning the set rate and currency risks are possible.
Het Parool, Thursday July 11 2013