Taxation of P2P Interest Income

Recently we assisted a European private investor relocating to Cyprus. As part of our pre-arrival planning, we reviewed his worldwide incomes to determine his tax position in Cyprus and his global effective tax rate. Upon review, we determined that the majority of his incomes emanated from bonds, stocks, and Peer to Peer (P2P) loans.

In this article, we examine the taxation of P2P interest income generated from P2P loans by Cyprus tax resident individuals.

What are P2P Loans

P2P lending is the practice of lending money to individuals or businesses through online services (platforms) that match lenders with borrowers. P2P companies offer their services online and provide their services more cheaply than traditional financial institutions. As a result, the lenders can earn higher returns compared to savings and investment products offered by banks, while borrowers can borrow money at lower interest rates.

A simplified example of how P2P lending works
Investing in P2P Loans

To perform an investment in a P2P loan, the lender/investor will review the available list of loan opportunities and sort them in accordance with his investing criteria such as interest rate, guarantee, duration, security, and other.

Once the lender identifies a loan or loans that match his criteria, he will ‘invest’ in the said loan by contributing a percentage (%) of the loan amount required by the borrower. Usually, lenders do not fund 100% of the borrower’s funding requirements, but rather a percentage (%) to minimize their risk and diversify their investments.

For every repayment of the principal and interest, the lender may manually re-invest his proceeds into other loans or withdraw the funds into his bank account.

Taxation of Interest Income

With respect to interest income, under Cyprus tax legislation there is a differentiation between active interest and passive interest.

Active interest is the interest generated from the ordinary carrying on of any business, including any interest generated which is closely connected with the ordinary carrying on of the business. Such interest includes the interest earned by banks, financing companies, insurance companies, and other similar arrangements.

Passive interest is the interest that is not active interest and mainly includes the interest derived from the provision of loans by a company to third parties and the interest earned from deposits or bonds.

The distinction is very important since active interest is taxed under Income Tax, whereas passive interest is exempt from Income Tax and is subject to Special Defence Contribution at the following rates:

Taxation of P2P Interest Income

By considering the ways by which our client invested in P2P loans, we determined that the specific interest should be considered as passive. This means that the interest income shall be exempt from Income Tax and be subject only to Special Defence Contribution. We also confirmed our interpretation by obtaining an Advanced Cyprus Tax Ruling.

Since our client is tax resident non-domiciled, such interest will be exempt from Special Defence Contribution for 17 years, effectively being tax-free! Once however, our client becomes domiciled (i.e. after the lapse of 17 years), such interest will be taxed at the prevailing rate of Special Defence Contribution.

Prior to the lapse of the said period, we will review his personal position and suggest possible restructuring opportunities to mitigate this future tax liability.


Generally, the interest income earned by Cyprus tax resident individuals from P2P loans should be treated as passive interest and be subject to Special Defence Contribution at the current rate of 30%. Cyprus tax resident but non-domiciled individuals are exempt from Special Defence Contribution.

There could be however a small number of cases whereby the interest is generated in an active manner, meaning that such interest should be taxed under Income Tax and be exempt from Special Defence Contribution. In such cases, the effective tax rate could be lower compared to passive interest, since certain expenses could be deducted from the gross interest (which is not the case with passive interest).

How can we help?

Should you earn or contemplate to earn significant interest income from P2P Loans, we are at your disposal to discuss your circumstances and how best to structure your P2P investments in order to mitigate your tax liability.

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