Changes in the taxation rules applicable to photovoltaic systems – Part I – Income tax treatment
Basic classifications up to now
(1) Income tax – Normally, the electricity that is generated using a PV system is entirely or partly sold to a grid operator. This economic activity constitutes a commercial operation for tax purposes. Up to 2021, upon application, the fiscal administration granted operators of smaller PV systems an income tax waiver.
(2) Value added tax – Operators of PV systems are normally considered to be business owners for VAT purposes. Up to now, this also applied to house owners who themselves live in their houses and who do not otherwise pursue any business activities provided that the electricity that is generated is normally entirely or partly fed into the public grid.
(3) Trade tax – Since 2019, legislation has been in place stating that smaller systems with a power output of up to 10 kWp can be exempted from trade tax. If trade tax is incurred then this can generally be offset in the income tax return.
This new year has now ushered in very fundamental changes in all areas; in the following section below we present the changes related to the income tax effects and then, in Part II, in particular, the VAT treatment.
Income tax changes
The legislative procedure that was completed in 2022 produced a special surprise at the end. An income tax-exempting provision with effect already from 1.1.2022 was included in the 2022 Annual Tax Act.
Tax exemption with capacity limits
In the case of income tax, a statutory tax exemption has been provided within a defined framework; therefore, in this respect, there is no longer any option. The limit for the permitted sizes of the systems has now been clearly defined under law; what matters is the gross nominal capacity as per the core energy market data register (Marktstammdatenregister). These income tax changes, which came into effect together with the 2022 Annual Tax Act, apply retroactively from 1.1.2022, or they apply to all systems that have been supplied and installed since 1.1.2022.
The law now stipulates that income and withdrawals that are generated in connection with the operation of PV systems on single-family homes or non-residential buildings with a power output of up to 30 kWp (peak) will be tax-free. For PV systems on other buildings that are used mainly for residential purposes, this statutory provision for exemption from income tax will apply to systems with a power output of up to 15 kWp (peak). In the final version, mixed-use buildings that are not used mainly for residential purposes are included; therefore, owners of buildings that are used 51% for commercial purposes and 49% for residential purposes are likewise exempted from income tax.
Where there are several systems, the tax exemption will be restricted to a power output of 100 kWp per taxpayer or partnership.
Please note: Multiplying by the number of residential or commercial units will thus now also remove even large systems form the scope of taxation.
Rules on aggregation
Testing for the new 30 kWp limit no longer requires several systems to be added together, therefore, the calculation has to be based on individual systems. This also basically applies for the multiplication limit (e.g., two 3-family homes: in each case 3 x 15 kWp = 45 kWp per property is permitted).
However, the aggregation has to be carried out for a planned upper limit of 100 kWp; this limit applies to all the systems of a taxpayer or partnership collectively. If, according to the core energy market data register, the overall gross capacity of a taxpayer’s systems thus exceeds 100 kWp then the tax exemption would not apply to any of the systems.
Aggregation may only be carried out if the legal entity is the same. For example, it would not be possible to add together the systems of jointly assessed spouses and also not if one system is operated by an individual and other systems in partnerships (GbR [company under German civil law]) together with other persons.
Please note: Aggregation may likewise not be carried out when there are several partnerships that, in our opinion, can also have identical ownership stakes.
Use is an irrelevance
The tax exemption, which is described above, will apply irrespective of how the generated electricity is used. Consequently, income will also be tax-exempt even if the generated electricity is fed entirely into the public grid, used to charge an electric vehicle that is used for private or business purposes, or used by tenants.
Businesses with solely tax-exempt income
If a business generates solely tax-exempt income from the operation of tax-privileged PV systems then profit would no longer need to be calculated. Correspondingly, the prohibition on the deduction of business expenses would then apply.
Asset managing partnerships
In the case of asset managing partnerships (e.g., a letting GbR), the operation of PV systems that do not exceed the tax-privileged system size limits would not result in the commercial ‘infection’ of the income from letting and leasing. Consequently, in future, asset managing partnerships will also be able to install PV systems with a power output of up to 15 kWp per residential or commercial unit (max. 100 kWp) on their rental properties and supply their tenants with self-generated electricity without having to fear any tax disadvantages.