Businesses can invest in the "NEO Finance" platform
In order to expand the scope of the P2P market in the country, an amendment to the Law on Consumer Credit, adopted by the Seimas in December 2020, came into force, indicating that not only natural persons, but also legal entities can become investors in Lithuanian peer-to-peer lending platforms. In response to the legal changes, the NEO Finance platform will allow businesses to invest in loans from February 2021.
Terms and conditions for investing for legal entities on the platform:
- Investing does not involve a direct contractual relationship between the investor and the borrower. The investor enters into an investment agreement with "NEO Finance" and "NEO Finance", as the operator of the peer-to-peer lending platform, enters into an agreement with the borrower.
- "NEO Finance" ensures full confidentiality of the individuals involved in the peer-to-peer lending, i.e. investors and borrowers do not see each other's data.
- The platform takes care of the distribution of the incoming instalments to the investors and, in the event of default by the borrowers, takes all appropriate measures to recover the consumer credit amounts, including interest and other amounts, and to carry out debt recovery procedures.
- The platform will regularly provide all the necessary information to the legal entity's accounting department for a simple and quick accounting of the investments in loans.
Registration of legal persons
Legal entities can register on the NEO Finance platform by clicking "Register" on the website and selecting "Business Entities" registration.
"NEO Finance" is obliged to establish the identity of the client and the beneficiary in order to implement the provisions of the Law of the Republic of Lithuania on the Prevention of Money Laundering and Terrorist Financing and the legal acts elaborating on it. In this context, legal persons will first be required to complete a 5-step questionnaire when registering:
- Information on the legal entity;
- Information on the manager and other responsible persons;
- Information on the activities to be carried out;
- Additional questions;
- Uploading documents.
Legal entity user environment
Once a legal entity has been successfully registered, it will have an e-money account similar to that of a natural person. Businesses will be able to invest up to a maximum of EUR 500 per loan, just like natural persons. This limit is laid down in the Law on Consumer Credit of the Republic of Lithuania and means that the total amount of consumer loans granted and outstanding by an investor to a single consumer borrower on a single peer-to-peer lending platform cannot exceed EUR 500.
Businesses will be able to download monthly reports showing the size of their portfolio at the beginning of the period, the related transactions during the period (accrued and actual receipts) and the size of their portfolio at the end of the period. This will enable the company's accounts to be kept in summary form without having to record each transaction separately.
Main differences in investment depending on the legal status of the person
Revenue is accounted for using the cash flow (actual receipt of revenue) method.
Revenue is accounted for on an accruals basis.
Hedge fund levies do not reduce the tax base on interest, but they do reduce the profits on secondary market transactions.
The hedge fund charges are an expense of the company's financial activities and are an allowable deduction for income tax purposes.
No need for bookkeeping, no need to employ a director.
The cost of bookkeeping, employing a director (in the case of an LLC), even for a few hours a month.
Tax rate 15% / 20% (GPT), €500 interest per person is tax-free.
Tax rates 0% / 5% / 15% (for legal entities registered in Lithuania).
In the secondary market, commissions do not reduce interest profits, but they do reduce profits on secondary market transactions.
Commissions paid on the secondary market reduce profits.
It is suitable for investment for those with wage income.
No dividends to pay out (15% tax rate), so more money can be invested.
Accounting for a legal entity
The peer-to-peer lending platform "NEO Finance" ("the Platform") is used to issue Consumer Loans to natural persons with the participation of 3 parties:
- Lenders (Investors)
- The Operator (the owner of the Platform)
"NEO Finance" is a crowdfunding platform where Consumer Loans are funded by several Investors.
Although the lenders are considered as investors and the Operator is involved as an intermediary in the process of granting the loans, this fact does not change the content and economic meaning of the economic transaction. Therefore, the Investor's funds used to finance the loans shall be considered as loan origination. The economic substance of the Investor's accounting shall be the recording of the financial receivables (loans granted) and the economic benefits (interest income).
The accounting for loans granted is subject to the recognition, measurement and derecognition of financial assets set out in Accounting Standard 18 'Financial Assets and Financial Liabilities' (IAS 18). A loan should be accounted for as a financial asset in accordance with paragraph 24 of the Standard when the entity transfers funds from the entity's bank account under an executory contract and becomes entitled to receive interest income for the period of the loan, at the end of which the funds will be returned to the entity.
For the purpose of the financial statements, the value of services rendered is recorded over the period of the loan in the balance sheet under the headings of accounts receivable after one year and accounts receivable within one year.
Interest income on loans is recognised and recorded in accordance with the general recognition and measurement of income in accordance with the provisions of Accounting Standard 10 'Revenue'.
For the purpose of the financial statements, interest income on loans granted is recognised in the income statement in the period of the loan under other long-term investment and loan income or other interest and similar income.
Unlike conventional loan agreements where the lender enters directly into a loan agreement with the borrower, in the case of transactions concluded on the Platform, the allocation of funds to the loan portfolio, the monitoring of the loans, the calculation of interest, etc., is carried out by the Operator and the Operator prepares an investment report containing full details of the balances, movements and accrued income of the loan portfolio.
The Statement of Investments provides a summary of the Investor's share of loans/investments, which includes the following information:
- The size of the investment portfolio at the beginning of the period. This is the portion of the credit outstanding at the beginning of the period, including accrued and unpaid interest, interest and other charges;
- New investments. Represents new investments acquired during the reporting period (new loans disbursed to borrowers);
- Interest. This is the amount of interest charged to the Investor in accordance with the borrower's repayment schedule;
- Interest accrual. This is the change in accrued interest over the period covered by the statement. The total amount of interest accrued during the reporting period is the sum of the total amount of interest and interest accruals reported in the statement. This satisfies the requirement to recognise income on an accruals basis;
- Default interest. This is the interest accrued during the reporting period;
- Other charges. These are miscellaneous other taxes charged during the period;
- The investor's share of the proceeds received from the borrowers by type: repayment of credit, repayment of interest, repayment of default interest and repayment of fees.
- The size of the investment portfolio at the end of the period;
- Late payment days at the end of the period. This is the additional information required by the Investor's accounting policy to calculate and record an allowance for doubtful debts;
- Short-term. This is the portion of the end-of-period portfolio size that is due to be paid by the beneficiaries within 12 months of the end of the reporting period;
- Non-current. This is the portion of the portfolio size at the end of the period that is due to be settled by the beneficiaries later than 12 months after the end of the reporting period.
Recommended accounting entries based on the Investment Report:
- New investments (debit YEARLY RECEIVABLES >> Other receivables / credit CASH)
- Interest, Accrual of interest, Delay interest and Other charges (debit ANNUAL RECEIVABLES >> Other receivables / credit REVENUE)
- Refunded credit part, Refunded interest part, Refunded late interest part, Refunded tax part (debit CASH / credit ANNUAL RECEIVABLES >> Other receivables)
- Exclusion of the non-current portion of investments (debit FINANCIAL ASSETS >> Receivables due after one year / credit WITHIN ONE YEAR >> Other receivables)