Loan and income tax – what to keep in mind

As it is well known, taking a loan involves additional costs. In addition to the amount borrowed, we always have to pay interest. Some, however, are wondering if these are the only fees or should they also expect taxes. In some cases, this is indeed the case, but there are also situations that exempt from tax.

When we borrow from a private individual

borrow money

To learn more about this matter, at the beginning you should ask yourself an important question – from whom we want to borrow money. If we sign a so-called loan agreement with a private individual, he or she may be subject to the tax on civil law transactions. In practice, this means that the person who collects money is obliged to pay the state 2% of the amount borrowed.

It should be noted, however, that only amounts over USD 5,000 collected from one person over three years are taxed. When this ceiling is exceeded, the borrower has 14 days to pay the applicable fee. Of course, it often happens that when borrowing money from a private individual we do not draw up any contracts, and this is a big mistake.

We should do it if we borrow sums greater than USD 500. Why is this so important? If the Tax Office finds out about a loan, it may impose a tax of up to 20% on it. Borrowing from a private person (who is not our relative) is usually associated with considerable risk and it is best to document the entire transaction and carefully check the terms of the contract, especially repayment information.

What about income tax?

We don’t really get any income by borrowing money, so we don’t have to pay tax. The lender is subject to taxation. When counting out a loan at an interest rate, he counts on profit, so he should pay tax on it. The last point is extremely important. He does not bear fees on the whole amount borrowed, but only on interest, which becomes income. In this case, a 19% fee is required, commonly known as tax – referring to individuals or traditional income tax – for businesses.

Advantages of non-bank loans

money and dollar

It turns out that when collecting money from non-bank companies, we do not have to remember any taxes. Therefore, we will be exempt from the aforementioned tax on civil law transactions, although of course we will still be obliged to pay the full amount of the loan plus accrued interest. As you can see, non-bank loans are much more profitable than, for example, a loan from a private individual.

In addition, we will be dealing with clarity of rules and certainty that we will have to give back exactly the amount (no more and no less) about which we were informed when concluding the contract.

There are ways to borrow money without paying taxes. However, these are a few situations and their choice should depend on our individual needs. One thing is certain – each transaction should be documented so that in the event of unforeseen situations we can check the provisions of the contract and refer to them.

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