A participatory loan is a loan whose remuneration depends on how the business receiving it performs: the lender earns more if the company does well and less if it does badly. It is regulated by article 20 of Real Decreto-ley 7/1996 and occupies the middle ground between ordinary debt and equity.
For a developer or an SME, its appeal lies in two specific effects: it counts as net equity for certain mercantile purposes and allows investors to come in without diluting share capital. Let's get to the specifics.
The rules of article 20
The full regime fits into four rules (art. 20 of Real Decreto-ley 7/1996):
- Interest linked to the business. The lender receives a variable interest depending on the performance of the company's activity: net profit, turnover, total equity or another criterion agreed by the parties. A fixed interest tranche may be added.
- Subordination. In the order of priority of credits, it ranks after ordinary creditors. It is paid late if things go badly; that is why it is better remunerated.
- Recognition as net equity. It is considered net equity for the purposes of capital reduction and dissolution due to losses provided for in mercantile legislation. It does not turn the lender into a shareholder, but it supports the balance sheet in the worst-case scenario.
- Conditional early repayment. It may only be repaid before maturity if it is offset by an increase in equity for an equivalent amount.
For tax purposes, interest is generally deductible as a financial expense. The relevant exception is participatory loans between companies of the same group after June 2014, whose remuneration is treated as equity and is no longer deductible (Ley 27/2014). Before structuring, that point is reviewed with the tax adviser.
| Aspect | Ordinary loan | Participatory loan |
|---|---|---|
| Remuneration | Fixed interest or linked to an index | Interest linked to business performance, with possible fixed tranche |
| Priority | Ordinary creditor | Subordinated: after ordinary creditors |
| Mercantile recognition | Liability | Net equity for capital reduction and dissolution purposes |
| Early repayment | As per contract | Only with an equivalent increase in equity |
| Typical use | General bank financing | Patient capital: developments, SME expansion |
Public bodies such as ENISA have used it for years as a support instrument for SMEs, which gives an idea of its fit: patient capital that accompanies the project without taking equity.
Why real estate developers use it
The early phase of a development, land purchase, permits and design, is the one that banks finance worst. The participating loan fits there: it is remunerated based on the result of the development, not with instalments from the first month, and its treatment as net equity for commercial law purposes supports the vehicle's balance sheet ahead of the subsequent developer loan.
For the investor, the position is intermediate: they get paid before the shareholder, share in the development's result and do not take on management. For the developer, the criterion is direct: it works when they want patient capital without giving up share capital or seats on the management body.
Relationship with tokenization: from bilateral contract to transferable security
A bilateral participating loan is a contract, not a transferable security. Distributing it among many investors requires choosing a route. The first is a crowdfunding platform, with a cap of 5 million euros per promoter in 12 months; we compare it in the crowdlending fact sheet (Regulation (EU) 2020/1503). The second is to structure the financing as a securities issuance, for example a bond with remuneration linked to performance, which enters the circuit of Ley 6/2023: entry in the register of an ERIR, the digital notary of the registry, and transferability among investors (Ley 6/2023; RD 814/2023).
The second route matters more the larger the amount and the broader the investor base. The full process for developers is in tokenization for real estate developers; the details of the debt instrument, in tokenization of debt and bonds in Spain. The regulatory circuit of any issuance, with ERIR and CNMV, in how to issue a security token in Spain.
Do you finance developments with participating loans and want to distribute them among more investors? Take the issuance assessment (2 min) or request a proposal. If you prefer to start by reading, download the 2026 guide.
This content is informative and educational. It does not constitute legal, tax, or investment advice. Check the current version of each regulation in the BOE and on EUR-Lex.
HokenFi is a software and infrastructure provider; it does not provide regulated services (CASP, ESI, EAF, or ERIR). This article is informative and does not constitute financial or legal advice.
Frequently asked questions
What is a participating loan?
It is a loan whose remuneration depends on the borrower's business performance: net profit, turnover or another agreed criterion, with a possible additional fixed tranche. It is regulated in article 20 of Real Decreto-ley 7/1996, it is subordinated debt and counts as net equity for certain commercial law purposes.
Does a participating loan count as equity?
It counts as net equity for the commercial law purposes of capital reduction and dissolution due to losses, under article 20 of Real Decreto-ley 7/1996. For accounting purposes it remains debt. That treatment protects the company in loss scenarios and supports its balance sheet before subsequent financiers.
Can a participating loan be tokenized?
The bilateral loan is not a negotiable security. To distribute it among many investors and give it transferability, it is structured as a securities issuance, for example a bond with participating remuneration, with registration in an ERIR under Ley 6/2023. For amounts up to 5 million euros, the alternative is a crowdfunding platform.
