Many German investors on Afranga ask our support team questions such as:
How is my interest taxed in Germany? Is it foreign income? Can I credit Bulgarian withholding tax?
Below is a practical overview based on the opinion provided by a leading the Frankfurt-based tax law firm.
1. How is interest from Afranga classified?
When you lend to a Bulgarian loan originator through Afranga, the interest you earn is treated as capital income under German law in accordance with § 20 (1) No. 7 EStG, which covers interest from loans and receivables. This means that the interest is fully taxable in Germany, just like interest from a German investment platform. So, in short, interest earned through Afranga is standard taxable capital income for German residents.
2. Is this considered foreign income?
Yes. German tax rules determine the “source” of interest based on the location of the debtor. Since most loan originators on Afranga are currently located in Bulgaria, this interest is classified as foreign capital income. That being said, German investors must declare and pay tax on it in Germany, but it will be treated as foreign-source income in the tax return.
3. Can Bulgarian withholding tax be credited in Germany?
Germany generally permits foreign withholding tax (WHT) to be credited against the German flat tax, but only within the limits of the Double Taxation Agreement (DTA). Under the DTA between Germany and Bulgaria, Bulgaria may withhold up to 5% tax on interest paid to German residents. Therefore, if a loan originator withholds 5%, that amount can typically be credited in Germany. If a loan originator withholds 10% (as is currently the case with Bulgarian LOs on Afranga), Germany will still only credit 5%. So, in short, Germany credits up to 5% withholding tax under the DTA.
4. How do you report Afranga income in your German tax return?
Based on the German law firm’s opinion, investors in Germany must enter the gross amount of interest income in accordance with § 32d of the Income Tax Act (EStG) on Annex KAP of their income tax return. The foreign tax is claimed for credit in accordance with § 34c EStG and can also be entered in the tax form KAP. So, in short, investors рreport gross interest in Anlage KAP, and claim the WHT credit under § 34c EStG.
Conclusion
For German residents, interest earned through Afranga is:
- taxable capital income
- sourced abroad
- eligible for a withholding tax credit of up to 5% under the Germany–Bulgaria DTA.
The overall process is straightforward once the rules are understood, but proper documentation is important. Because each investor’s situation may differ, we strongly recommend each investor to individually consulting a qualified German tax advisor.
Important disclaimer: This article is not tax advice. Each investor’s situation is different, and you should always speak with a qualified tax advisor. The information below is based on an analysis commissioned by Afranga from a Frankfurt-based law firm specializing in German tax law.