Changes in the taxation rules applicable to photovoltaic systems – Part II – VAT treatment
In the last article, in January, with regard to the taxation of photovoltaic systems, we looked at the new regulations applicable to income tax that were introduced via the German 2022 Annual Tax Act with retroactive effect as of 1.1.2022. In the following section we now discuss the changes to VAT that have been applicable since 1.1.2023. The legislation left many questions about invoicing and input tax deduction unanswered and so, on 16.12.2022 already, the fiscal administration published a list of FAQs and, on 26.1.2023, a Federal Ministry of Finance (Bundesministerium der Finanzen, BMF) draft circular was published.
Zero rate of VAT and self-consumption
In principle, for all PV systems that are supplied and installed as of 1.1.2023, the legislation provides for a zero rate of VAT to be applied to the supply, installation, import and intra-Community purchase of tax-privileged solar modules as well as other main components including the battery bank. The eligibility criterion for the application of a zero VAT rate is – as a so-called property-related condition – that the PV system has to be installed on or close to private dwellings, apartments and public and other buildings used for activities in the public interest. This criterion will be deemed as fulfilled if the gross capacity of the PV systems that are installed does/will not exceed 30 kWp (peak) according to the core energy market data register. The BMF is planning to review the 30 kWp limit on a system-specific basis. If, after the 1.1.2023, an existing system is expanded then VAT would not be applicable on the purchase of components including the installation.
Please note: The previous provisions and options concerning VAT will continue to apply in full to PV systems that were already supplied or installed before 1.1.2023.
Up to now, PV system operators were able to completely allocate their systems to business assets, irrespective of the share of self-consumption, and thus also deduct the input tax in full (Section 15(1) no. 1 and (2) sentence 2 of the VAT Act [Umsatzsteuergesetz, UStG]). However, in principle, the electricity used for private purposes had to be reported as a free benefit (‘self-consumption’).
The fiscal administration is planning the following approach. With respect to a free benefit in relation to a service that is subject to a zero VAT rate (Section 12(3) UStG), a distinction has to be made as follows:
(1) If, when the item was purchased, there was an entitlement to full or partial input tax deduction (zero VAT rate not applied) then the subsequent withdrawal and free-of-charge contribution or use of the item, under the other conditions, would constitute a free benefit. A withdrawal is only possible if at least 90% of the generated electricity is used for non-commercial purposes. Under the conditions of Section 12(3) UStG, this free benefit is subject to the zero VAT rate.
(2) If the purchase of the item was subject to the zero VAT rate then the subsequent withdrawal, free-of-charge contribution or use of the item would not constitute a free benefit.
Other types of tax
All in all, it can be stated that, in the course of the installation and operation of a PV system, the operator will encounter (almost) the entire spectrum of German tax law.
(1) Corporation tax – Under the legislation, the exemptions in the case of income tax will also apply to businesses as well as other organisations that are subject to corporation tax.
(2) Trade tax – A tax exemption is also applicable for trade tax. However, according to the current legal situation, Section 3 no. 32 of the German Trade Tax Act, which is restricted to PV systems with installed capacity of up to 10 kWp, has not yet been dropped. Up to now, the purpose of this provision was, in particular, to allow operators of PV systems to avoid the obligation to pay contributions to the Chambers of Industry and Commerce.
Please note: The aim of the BMF circular is, admittedly, to provide more clarity. However, even with this there are individual issues, such as how to deal with pre-payment invoices as well as the possible effects on the withholding tax for construction services (Bauabzugsteuer), that have not yet been clarified.