Developer loans in Germany: rules and taxes

Taxes and fees

How to recognise a compliant offer to lend to a German developer: BaFin, the prospectus rules, EU crowdfunding, what protection does not exist, tax in brief, and questions to ask.

A private loan to a property developer is neither a bank deposit nor the purchase of a flat. It is a claim against a company, and the rules that apply to it, and the way the interest is taxed, depend on how the offer is built. This guide is meant to help you recognise a compliant offer and ask the right questions. It is general information, not legal or tax advice, and your capital is at risk: a developer loan can lose part or all of its value, whatever the interest rate on the first page says.

First, what kind of product is it?

Offers that look alike can be legally different things:

An individual loan between you (or a vehicle you own) and one named company, usually backed by a land charge (Grundschuld) on a German property.
A subordinated or profit-linked loan (Nachrangdarlehen, partiarisches Darlehen) offered to many investors. German law treats these as asset investments (Vermögensanlagen).
A bond or note: a security, under the securities rules.
A loan arranged through a crowdfunding platform, under the EU crowdfunding regulation.

Ask the seller in writing which of these it is. The answer decides which documents you should receive and who supervises what.

When lending is a regulated activity

In Germany, granting loans on a commercial basis is a banking business that needs a BaFin licence under section 32 of the Banking Act (KWG). Commercial means, in the words of the legal commentary, a business set up to last and carried on with the aim of profit. The test looks at the lender that makes loans as its business, not at an individual who lends once. It matters to you in two ways: if a company pools money from many people and lends it on, ask which licence or exemption allows that; and if you plan to lend regularly yourself, take advice before you start. We found no source on the position of an occasional private lender, so we do not state one.

Which regime: prospectus, information sheet or neither

Where an offer is made to the public as an asset investment, the Asset Investment Act (VermAnlG) generally requires a sales prospectus approved by BaFin, or in some cases a short information sheet (VIB). The Act lists the products it covers, among them profit-linked loans and subordinated loans. Two points from BaFin's own practice are worth knowing. First, BaFin checks that a prospectus is complete and understandable; it does not assess whether the project is economically sound. Second, approval is not a lasting guarantee: BaFin has prohibited offers that lacked a permitted information sheet, and it has said that issuers of subordinated loans work in a grey area.

There are exemptions. For crowdfunding, section 2a of the Act, according to the current text as summarised by law firms, exempts offers by one issuer of up to EUR 6 million in twelve months from the prospectus duty (the limit was EUR 2.5 million before 2019), but with a short information sheet and with a cap on each investor's amount: EUR 1,000, or EUR 10,000 if you show at least EUR 100,000 of free assets. Check the statute for the exact figures. Whether a plain loan between a single named lender and a single borrower falls under the Act at all depends on its structure and on how many investors the borrower approaches, so ask the seller for its written analysis.

To check whether a public offer is backed by an approved prospectus, BaFin keeps a public database of deposited prospectuses. If the seller says one exists, look it up yourself.

The EU crowdfunding regulation

Regulation (EU) 2020/1503 applies across the EU from 10 November 2021. A crowdfunding platform needs authorisation under it, and the rules cover offers by one project owner of up to EUR 5 million over twelve months; larger offers fall under the securities regime (the prospectus and MiFID rules). The platform must give you a key investment information sheet, prepared by the project owner, with a risk warning. Investors who are not classed as sophisticated get a reflection period of four days in which they can withdraw without giving a reason. Sources differ on how the EUR 5 million limit is calculated, so read Article 1 of the regulation if the number matters to you.

What protection does not exist

The statutory deposit guarantee protects bank deposits up to EUR 100,000 per customer per bank. It does not apply to a loan you make to a company. A voluntary bank scheme does not change this.
BaFin does not supervise a direct investment on an ongoing basis, so nobody checks for you whether the assets exist or whether the project is progressing.
The land charge helps, but it is not a promise of repayment. In a forced sale the court sets a value from an expert report, and consumer guides state that the first auction date has a floor of half of that value (70% if the creditor applies), that proceeds are paid out in order of rank, and that any shortfall stays unpaid. A building that was never finished sells for less than a finished one, and a charge ranking behind a bank's takes what is left.
A project can be late, and loans are often extended. An extension is a risk to your timing, not only a convenience.

Tax in brief

Tax is a question about you as much as about the borrower. For a private investor who is tax resident in Germany, interest is normally taxed at a flat 25% plus a 5.5% solidarity surcharge calculated on that tax (26.375% together, church tax extra), with an annual allowance of EUR 1,000 (EUR 2,000 for couples) that the bank applies only if you file an exemption order. That does not describe a foreign lender.

For a lender who lives abroad, German case law (a 1994 Federal Fiscal Court ruling) treats interest on a loan secured by a land charge on German property as German-source income, which can create a limited German tax liability. Whether Germany may actually tax it depends on the double tax treaty between Germany and your country. Many treaties give the right to tax interest mainly to the country where the lender lives, but some preserve exceptions, and none was checked for this article. One firm's tax summary says that this tax is assessed rather than withheld, but we could not confirm how it works for a foreign private lender. Your home country will usually tax your worldwide interest too. Ask the seller for a written statement on withholding and forms, and ask your own tax adviser before you commit.

What to ask the seller

Who is the borrower exactly? Ask for the legal name and commercial register number, and check the register entry yourself.
Who is the lender: you, a platform or a special-purpose vehicle? Who holds your claim if the platform fails?
Which regime applies: individual loan, asset investment, crowdfunding or securities? Ask for the prospectus, information sheet or key investment information sheet, and for the BaFin reference.
Is the seller or platform authorised? Check BaFin's company database, and for intermediaries the register of financial investment intermediaries kept by the chambers of commerce (these need a permit under section 34f of the trade code).
What is the security? Ask for an extract from the land register: is the land charge entered, in whose name (a security trustee?), at what rank, and what ranks ahead? Who valued the property, when, and what share of that value does the loan represent?
What does the project need to repay you? Building permit, construction stage, budget, funding gap and the planned exit (sale of units or refinancing). What happens if it is delayed, and who decides on an extension?
Is the loan subordinated or does it contain a priority clause? Who is paid first?
Where does the money go? Look for a notary, escrow or trustee account with release conditions, not a transfer straight to the developer.
What are all the fees, and what is the tax treatment in writing?

Warning signs: a promised or guaranteed return, a return far above bank rates with no explanation of the risk behind it, pressure to decide quickly, no documents until after you pay, and a seller that cannot name the borrower or the security.

Common misunderstandings

Secured does not mean safe. A land charge gives you a claim on the property, so what matters is what the property is worth in a forced sale and how many claims rank ahead of yours.
An approved prospectus does not mean a good project. BaFin checks completeness and clarity, not whether the numbers work.
A German borrower does not mean German-bank protection. The deposit guarantee is for deposits at banks, not for loans to companies.
The interest rate is not your return. It is the contractual maximum, before delays, costs, tax and any loss of principal.

How we help

We can show you the documents and terms of the financing projects we currently work with, so you can read them with your own lawyer and tax adviser. We do not quote return figures and we do not give legal or tax advice. For the wider picture of risks in German property see risks of investing in German property, and to compare this route with other ways into the market read developer loan, rental apartment or listed fund: how they compare.

Developer loans in Germany: regulation and taxes for private lenders