Details on the tax exemption for photovoltaic systems

From 2022, a tax exemption regulation will apply to many smaller photovoltaic systems, for which the Federal Ministry of Finance has now answered many questions of doubt.

The 2022 Annual Tax Act contained two very far-reaching tax exemptions for photovoltaic systems. On the one hand, there is the zero VAT rate, which has applied since January 2023 and for which the tax authorities quickly regulated many details. In addition, an exemption from income tax, corporation tax and trade tax was also introduced for taxable income generated by many smaller photovoltaic systems. This even applied retroactively from January 1, 2022.

However, what initially sounds positive all round also brings with it pitfalls and downsides. The biggest disadvantage of the tax exemption is that, unlike the previous hobby regulation for small photovoltaic systems, it is not optional, but applies to every qualifying system. However, if the income is tax-exempt, no related expenses can be claimed for tax purposes, which in the case of photovoltaic systems relates in particular to the depreciation of the system. Losses in the initial phase therefore also no longer have a tax effect in many cases.

One of the main pitfalls of the tax exemption is the interaction of the tax exemption with other tax regulations that are linked to the generation of taxable income or similar requirements, such as the use of an investment deduction. The Federal Ministry of Finance has now issued an administrative instruction on many of these questions, which provides clarity for operators of photovoltaic systems. Here is a summary of the clarifications provided by the administrative instruction as well as further information on the tax exemption regulation.

• Eligibility: The tax exemption for certain photovoltaic systems applies to natural persons as well as to shares in a partnership (co-entrepreneurship) and to corporate bodies (associations, corporations, etc.).

• No right to vote: Until 2021, operators of small photovoltaic systems with an output of up to 10 kW(p) could apply for classification as a hobby business, which meant that income, withdrawals and expenses in connection with the system no longer had to be recorded for tax purposes. In contrast to this hobby regulation granted by the tax authorities, the new tax exemption regulation will apply by law from 2022 to all systems that meet the requirements. This means that the operator no longer has the right to choose whether or not to record the system for tax purposes. There is also no transitional option for systems acquired before 2022, which means that losses can no longer be claimed for these systems from 2022.

• Beneficiary investments: The tax exemption applies to all photovoltaic systems operated for profit that are located on, on or in a building and do not exceed the output limit for the tax exemption. This also includes roof-integrated and façade photovoltaic systems. A system is also exempt if it is installed on or on an outbuilding (garden shed, garage, carport, etc.). Incidentally, it is irrelevant for the tax exemption whether the operator of the photovoltaic system is also the owner of the building on, on or in which the system is located. Whether the building is used for residential, commercial or mixed purposes only plays a role in the tax exemption insofar as the output limit for tax-privileged systems is based on the type of use. However, tax exemption is possible for all types of use. Ground-mounted photovoltaic systems, on the other hand, are not exempt regardless of their size.

• Significant performance: The gross output of the photovoltaic system(s) according to the market master data register in kilowatts (peak) (hereinafter referred to as kW(p)) is decisive for the tax exemption. In order not to exceed the output limit for the tax exemption, it is therefore not sufficient to simply decommission or dismantle individual panels of a photovoltaic system.

• Performance limits: For the tax exemption, there is both a building-related and a personal maximum output that may not be exceeded by the photovoltaic system(s). These are exemption limits which, if exceeded, completely rule out tax exemption for the individual system (building-related limit) or even the operator as a whole (personal limit).

• Building-related limit: The maximum output that the photovoltaic system on a building may have in order to benefit from the tax exemption depends solely on the number of usage units in the building. If the building has only one unit of use, the system may not exceed a maximum output of 30 kW(p). It does not matter whether the building is a single-family home used for residential purposes, whether it is used commercially by a business or whether there is only one other building on the property (e.g. a garage).

  

  For two-family and multi-family houses as well as purely commercial properties with more than one unit of use, on the other hand, a power limit for the photovoltaic system of 15 kW(p) per unit of use applies. Whether a unit is used commercially or for residential purposes is irrelevant. The number of units depends on their independent and autonomous usability.

• Several installations on the building: The building-related limits do not apply to the building as a whole, but per system operator. If there are one or more other photovoltaic system(s) on the building that belong to a different operator, their output is irrelevant for the assessment. For example, a married couple can operate two systems, each with a gross nominal output of 25 kW(p), on their owner-occupied detached house, one of which belongs to the wife and the other to the husband. It does not matter whether the systems are technically separate from each other. Even if a total system output of 50 kW(p) is installed on the building, the building-related limit per person is not exceeded. However, the situation is different if the couple operate both systems together, as the building-related limit of 30 kW(p) would then be exceeded for the partnership consisting of the husband and wife. As the building-related limit is checked separately for each taxpayer and each partnership, the tax exemption would also apply if the spouses operate one of the systems jointly as a partnership and one of them operates the other system alone.

• Personal limit: The tax exemption is only granted if the sum of the relevant outputs of all the operator's (individual, partnership or corporation) eligible photovoltaic systems does not exceed 100 kW(p). When calculating the total, it does not matter whether the systems are located on the same property or on different properties. It also makes no difference whether the systems are technically separate from one another. If the operator also has a stake in a company that also operates photovoltaic systems, the systems operated by this company are not counted proportionately when checking the 100 kW(p) limit. Only the systems operated by the operator himself count towards the limit. However, if the limit is exceeded, all systems are no longer eligible. It is therefore not possible to pick out individual systems with a total output of less than 100 kW(p) and claim the tax exemption for these.

• Testing the limits: Compliance with the limits is checked in a two-stage procedure. The first step is to check whether the relevant outputs of the photovoltaic systems comply with the permitted size per building for the respective building type. In the second step, it is then checked whether the respective operator complies with the 100 kW(p) limit overall. In this second step, all systems that did not qualify as beneficiaries in the first step are disregarded. Therefore, if a photovoltaic system on a building has a gross nominal output that exceeds the exemption limit for this building, the income generated from it is still taxable and the output of this system is not counted towards the personal maximum limit. The same applies to ground-mounted photovoltaic systems, which cannot qualify for the tax exemption due to their design and are therefore also not counted towards the operator's personal maximum limit. The tax authorities make no statements as to whether systems that are not operated with the intention of making a profit are also disregarded when checking the personal limit. However, from a tax system perspective, it makes sense to assume that these systems are also disregarded.

• Change in circumstances: If the circumstances change during the current year such that the conditions for tax exemption are no longer met or are met for the first time, the tax exemption only applies up to or from this point in time. The income, withdrawals and expenses in connection with the investment must then be divided into a taxable and a tax-exempt part during the year. The start or end of the tax exemption can be triggered in particular by a change in the output of an existing photovoltaic system, the commissioning or decommissioning or sale of systems or by changes to the building (division or merging of usage units, addition of further usage units).

  

• Current income: The tax exemption covers income and withdrawals regardless of the use of the electricity generated by the photovoltaic system. Income includes, in particular, the feed-in tariff and payments for direct electricity supplies to tenants or other customers, payments for charging electric and hybrid electric vehicles, subsidies and the VAT collected and refunded in the revenue surplus account. Withdrawals are tax-free if the electricity is used for non-business purposes, i.e. in particular if it is used privately, provided to third parties free of charge, used to charge electric/hybrid vehicles or consumed in rooms that are used to generate income from another source of income (e.g. home office). There is no withdrawal if the electricity is supplied in connection with the provision of the rooms to an employee of the business operating the photovoltaic system or if an electric vehicle charged with the electricity is part of the business assets of the business operating the photovoltaic system.

• Withdrawal/sale of the investment: If the business only has tax-free income and withdrawals from the generation of electricity with a photovoltaic system, the profit or loss from the sale or withdrawal of the photovoltaic system from the business assets also falls under the tax exemption. The Federal Ministry of Finance does not clearly state whether this also applies to systems with which taxable income was or will be generated in another assessment period. However, there is much to suggest that it depends solely on the circumstances in the year of the sale or withdrawal of the investment. If, on the other hand, the business generates other taxable income or the electricity generated is partially or fully consumed in the business in the generation of other income, the tax exemption for the profit or loss from the withdrawal or sale of the system only applies partially at best.

• Prohibition of deduction of expenses: There is a general prohibition on deducting expenses in connection with tax-free income. Therefore, all expenses that are directly economically related to the current or future operation of subsidized photovoltaic systems are not deductible as business expenses or income-related expenses. However, the ban on deductions only applies from 2022 onwards. If operating expenses were incurred before 2022, they can still be claimed in previous years. It may therefore be particularly worthwhile to claim a special depreciation allowance of a maximum of 20 % of the acquisition costs for photovoltaic systems acquired shortly before 2022 in 2021, provided this has not yet been done and the tax assessment notice is not yet final, as this regulation, as well as the investment deduction and other regulations, can also be applied unchanged for systems that now benefit up to and including 2021.

  However, a dispute with the tax office is foreseeable if operating expenses for a tax-privileged photovoltaic system relating to the period before 2022 are still incurred in an income statement after 2021. As the tax exemption did not yet apply in 2021, the expenses should be claimed in any case because they are not directly economically related to tax-exempt income.

• Exception to the ban on deductions: The prohibition on deducting business expenses does not apply, or does not apply in full, if a subsidized photovoltaic system is part of the business assets of a business whose purpose is not exclusively the operation of subsidized photovoltaic systems. If the electricity generated is consumed directly in the business, a deduction of business expenses is still possible. The deduction ban only applies to the part of the electricity generated that is fed into the grid, withdrawn for private and other non-business purposes or sold to third parties. However, the operating expenses are not to be divided into deductible and non-deductible expenses according to the ratio of electricity consumed for business purposes to the remaining electricity generated. Instead, the prohibition on deducting business expenses only applies up to the amount of tax-free income and withdrawals.

  However, if the electricity is partially consumed in another business of the system owner, the prohibition on deducting business expenses would apply in this respect. Whether the photovoltaic system is part of a second, independent business or whether a single business exists depends on the circumstances of the individual case. The tax authorities only assume a single business if the two businesses support and complement each other. However, the tax office considers it to be a strong indication of a single business if more than 50 % of the electricity generated by the photovoltaic system is consumed in the other business.

• Investment deduction: If a photovoltaic system is part of the business assets of a business whose purpose is not only the generation of electricity from photovoltaic systems, the regulations on investment deductions continue to apply unchanged. Investment deductions are neither reduced nor does the addition in the investment year fall under the tax exemption. However, the use of investment deductions requires a business activity with the intention of making a profit and therefore with a forecast total profit. If the operating income is therefore generated exclusively from the generation of electricity with photovoltaic systems that are now tax-exempt, it is no longer possible to claim an investment deduction for financial years ending after December 31, 2021 because there is no longer any profit to be determined.

  Investment deductions claimed in financial years ending before January 1, 2022 and not yet added to profit by December 31, 2021 must be reversed if the investment consists of one or more photovoltaic system(s) that now benefit from the deduction. However, the reversal of the deduction amount leads to interest on arrears. As the extension of the tax exemption originally planned from 2023 to 2022 will first appear in the legislative process on November 30, 2022, an equitable application should be submitted to the tax office for the waiver of interest on arrears or transfer of the deduction amount to the acquired system for photovoltaic systems acquired by the end of November 2022. In the second case, the deduction amount would then not be reversed retroactively, but only in 2022 to increase profits.

• Hidden reserves: If taxable income was generated from a photovoltaic system before it was transferred or transferred to another business, any subsequent surrender or disposal gain would also be taxable. Therefore, the transfer or transfer of a photovoltaic system is only possible at book value - i.e. without the disclosure of hidden reserves - if it does not "slip" into the tax exemption. This is only the case if the system was already tax-privileged prior to the transfer or transfer or if the business to which the system is transferred or transferred will also generate taxable income with the system. If only the electricity generated by a photovoltaic system is consumed in another business of the system operator, the transfer is to be valued at the book value under the usual conditions.

• Commercial infection: As the operation of a photovoltaic system has previously led to income subject to trade tax, the income from the system could lead to a commercial infection of the other income of an otherwise asset-managing company, which applies in particular to real estate companies that have generated electricity on rented properties and sold it to tenants or fed it into the grid. Because the tax exemption also means that the commercial investment income is no longer deducted from the income that would otherwise not be subject to trade tax, the subsequent disclosure of hidden reserves through the sale or withdrawal of assets would no longer be subject to trade tax. For this reason, the tax authorities require that all assets, with the exception of the photovoltaic system(s), must be withdrawn in 2022 if the company's commercial infection has so far arisen solely from the operation of the photovoltaic system(s). This forced disclosure and taxation of the hidden reserves can only be prevented if the trade tax liability of the hidden reserves is restored by December 31, 2023 for other reasons. In this case, the tax office will waive the compulsory withdrawal of the assets for reasons of legitimate expectations.

• Economic allocation: The photovoltaic system is to be treated as an independent movable asset for income tax purposes. A photovoltaic system essentially consists of solar modules, an inverter and a feed-in meter.

• Different financial year: The tax exemption and the associated consequences apply to all income, expenses and withdrawals that occur after December 31, 2021. This regulation also applies in the case of a financial year that deviates from the calendar year, which is why the income, expenses and withdrawals in the financial year in which the turn of the year 2021/22 falls must be allocated accordingly. The time allocation depends on the type of profit determination (balance sheet or income statement).

• Craftsman services: The tax bonus for household-related services and craftsmen's services requires that the expenses claimed are not business expenses or income-related expenses. However, this is regularly the case for photovoltaic systems if they are operated with the intention of making a profit, even if the operating expenses or income-related expenses incurred can no longer be claimed as tax-reducing due to the ban on deducting expenses in connection with tax-free income. The tax authorities have therefore stipulated that the tax authorities should assume that PV systems on buildings used for own residential purposes that fall under the tax exemption regulation are operated without the intention of making a profit. As a result, the associated tradesman services are eligible, provided that the other eligibility requirements for the tax bonus are met. However, only repairs, renovations and modernization measures are eligible for the tax bonus. If the PV system is therefore purchased and installed during or immediately after the new construction of the building, the tax bonus for the labor costs is not available. However, the tax bonus is available for the subsequent installation of a PV system or subsequent extensions and repairs.

  

• Energy measures: There is a special tax bonus for certain energy-saving measures in owner-occupied buildings that are more than ten years old. Like the reduction for craftsmen's services, this tax bonus requires that there are no business expenses or income-related expenses, which poses the same problem. In addition, this tax reduction is limited to very specific measures, including the renewal of the heating system. In contrast to tradesmen's services, however, the tax authorities have not explicitly regulated whether a PV system that is purchased in conjunction with a heat pump and supplies the electricity required to operate it is also eligible for tax relief for energy-related measures. Anyone planning such a combined purchase should therefore always consider claiming the tax reduction and invoke an analogous application of the fairness rule for craftsmen's services as long as there are no binding statements on this issue from the tax authorities or case law.

• Hobby regulation: Prior to the new tax exemption, there was the hobby regulation, according to which small photovoltaic systems up to 10 kW(p) and combined heat and power plants up to 2.5 kW could be classified as a hobby business upon application, which meant that tax registration was no longer applicable even before the new regulation. This regulation continues to apply to combined heat and power plants because the new legal regulation only affects photovoltaic systems. For photovoltaic systems, on the other hand, the regulation has lost its significance from 2022 and therefore applications are no longer possible for systems commissioned after 2021.

  However, the regulation is still relevant for systems that were put into operation before 2022, at least as far as the assessment years up to 2021 are concerned. The Federal Ministry of Finance has therefore now extended the application deadline for such systems, which expired at the end of 2022, until December 31, 2023, so that operators can have their system exempted from tax registration from the outset. Anyone who has already submitted an application for the hobby regulation for a photovoltaic system this year, which was rejected due to the deadline being exceeded, can now submit a new application, which will then be reviewed and approved if the requirements are met.