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Home / News / Real Estate News / Nexia Advicero | Taxation and renewable energy | May 2024

Nexia Advicero | Taxation and renewable energy | May 2024

  1. Wind Farm vs. Virtual Power Purchase Agreement and Guarantees of Origin
  2. VAT on supply of HVAC export cable system to wind farm
  3. Compensation for curtailment of electricity production – moment of revenue recognition
  4. Access road to wind farm in tax costs
  5. Changes in property tax
  6. The timing of recognition of the allowance for the Difference Payment Fund in tax expenses
  7. Energy investments without a limit on the cost of debt financing
  8. No VAT on the installation of RES systems and asbestos removal by local government units

1. Wind Farm vs. Virtual Power Purchase Agreement and Guarantees of Origin

We know the position of the Director of the National Tax Information on the VAT taxation of virtual power purchase agreements (hereinafter: “VPPA”) and Guarantee of Origin.

In the tax ruling dated 19th March 2024, ref. no. 0114-KDIP4-3.4012.557.2023.6.DS, the Director of the National Tax Information ruled on the VAT taxation of VPPA and Guarantee of Origin transactions of a company engaged in the business of generating and selling electricity from wind farms.

A VPPA is a contract under which the parties settle between themselves the difference between the price set in the contract and the current wholesale price of electricity for the agreed volume. In doing so, however, they do not make an actual sale of electricity. For the generator, it is only of a hedging nature. For this reason, the Director of the National Tax Information concluded that:

  • the seller is both a service provider and a service recipient, depending on whether it pays remuneration for or receives remuneration for energy price hedging in the VPPA transaction,
  • the transaction is subject to VAT exemption as a financial instruments transaction, (Article 43(1)(41) of the Tax on Goods and Services Act of 11th March 2004 (hereinafter: the “VAT Act”)
  • VAT obligation arises upon receipt of all or part of the payment therefor and with respect to the amount received,
  • turnover from VPPA, cannot be considered as ancillary activities, so it should be included in the turnover taken into account when calculating VAT pro-rata coefficient under Article 90(2) of the VAT Act.

Guarantee of Origin, on the other hand, is an instrument confirming that a given amount of electricity injected into the distribution or transmission network was produced at renewable energy production facilities, excluding green certificates. In this case, too, there is no transfer of ownership of the goods in the form of electricity, therefore:

  • should be treated under the VAT Act as a VAT-taxable and non-exempt supply of services,
  • regardless of whether the Guarantees of Origin are transferred to the buyer or to a third party designated by the buyer, the buyer should be considered the recipient to whom the service is provided,
  • tax liability arises at the time of the corresponding entry in the Guarantees of Origin Register,
  • invoices should be issued no later than the 15th day of the month following the month in which the relevant entry was made in the Register of Guarantees of Origin, both in the case of transfer of Guarantee of Origin to a third party and to the buyer.

Link to the full tax ruling: https://eureka.mf.gov.pl/informacje/podglad/581771

2. VAT on supply of HVAC export cable system to wind farm

The supply with installation of an HVAC export cable system for the construction of a wind farm constitutes a complex service, taxed after all activities covered by the contract have been completed or individual payments have been made in accordance with the schedule.

In the tax ruling dated 15th February 2024, ref. no. 0114-KDIP1-2.4012.566.2023.2.AGM, the Director of the National Tax Information confirmed this. The case concerned a contract for the design, manufacture, transportation and installation of an HVAC export cable system for a photovoltaic farm under construction by the buyer, together with the supply of spare parts, accessories and repair kits. The applicants, supporting their argumentation on the jurisprudence of the Court of Justice of the European Union and the position of the Polish tax authorities, considered that due to the possibility of distinguishing the main service and the recognition of the other services as auxiliary services, allowing for the proper performance of the supply, the performance of services under the executed contract should be considered as a comprehensive service.

The Director of the National Tax Information agreed with this position and confirmed that this should be treated as a comprehensive supply for VAT purposes and taxed in accordance with Article 22(1) of the VAT Act as a supply of goods with assembly at the place of assembly. Due to the above classification, the VAT obligation for the supplier will only arise when the supplier performs all the activities covered by the contract, or due to the established payment schedule at the time of receipt of each payment for the amount involved.

As for the purchaser, on the other hand, under Article 86(1) of the VAT Act, the ability to deduct input tax is available to VAT taxpayers, against those acquisitions of goods and services that are used to perform taxable activities. At the same time, the purchased cable system is necessary and will be used for the company’s VAT-taxable activity of selling the electricity produced by the wind farm. Therefore, the company purchasing this supply is entitled to deduct input tax in full.

Link to the full tax ruling: https://eureka.mf.gov.pl/informacje/podglad/578480

3. Compensation for curtailment of electricity production – moment of revenue recognition

The electricity producer is entitled to financial compensation for outages / curtailments of electricity production at the direction of the grid operator. It constitutes revenue recognized at the time of receipt of funds. In addition, the funds received cannot be considered tax-exempt subsidies from the state budget or local government units.

This was stated by the Director of the National Tax Information in the tax ruling dated 30th January 2024, ref. no. 0114-KDIP2-2.4010.615.2023.4.KW. Pursuant to Article 9c(7a-7c) of the Energy Act of April 10, 1997 (hereinafter: the “Energy Act”), the grid operator may issue an order to limit or stop the generation of electricity in, among others, RES installations connected to the national electricity system. This is a decision that electricity producers must comply with, although it is contrary to the purpose of their business. For this reason, on the basis of Article 13(7) of Regulation (EU) 2019/943 of the European Parliament and of the Council of 5th June 2019 on the internal market in electricity, such producers are entitled to financial compensation for not producing electricity in the amount it would have been produced in the case of unlimited top-down production. In the Polish legal order, this issue is regulated by Article 9c Section 7j of the Energy Act. Contrary to the applicant’s position, the Director of the National Tax Information found that this compensation cannot be exempted under Article 17(1)(47) of the Corporate Income Tax Act of 15th February 1992 (hereinafter: the “CIT Act”), as it refers to a “subsidy,” which is a different instrument than compensation. Therefore, the compensation will constitute income within the meaning of Article 12(1) of the CIT Act, for which the tax obligation will arise when the applicant receives the cash.

Link to the full tax ruling: https://eureka.mf.gov.pl/informacje/podglad/577123

4. Access road to wind farm in tax costs

Expenses incurred for reconstruction of municipal roads allowing access to a wind farm can be included as a tax-deductible cost even if they are not owned by the entrepreneur implementing the investment.

Such a favourable tax ruling for wind farm developers was issued by the Director of the National Tax Information on 21st March 2024 (no. 0114-KDIP2-1.4010.64.2024.1.PK). In connection with its investment, the applicant has entered into an agreement with the municipality where it is implementing the investment to reconstruct municipal roads so that the necessary materials and equipment can be transported. Without this reconstruction, it would be impossible to erect and continue to operate, use and exploit the farm. The company bore the entire cost of the road investment, which was directly related to its business activities and enabled it to generate revenue. Therefore, despite the fact that the company does not have any legal title to the road to be able to renovate it, the expenses incurred in this connection are deductible expenses, pursuant to Article 15(1) of the CIT Act. Due to the impossibility of assigning the incurred costs to a specific revenue, this is an indirect cost, so the provision establishing the moment when the cost is incurred as the date on which the cost is recognized in the accounting books on the basis of an invoice (or other evidence) received will apply. In this case, it will be the moment of formal transfer of the acceptance protocol to the municipality.

5. Changes in property tax

Due to the lack of official information on the legislative work that should follow the Constitutional Court’s verdict of SK 14/21 of 4th July 2023 declaring the definition of a structure contained in the Act of 12th January 1991 on Local Taxes and Fees to be unconstitutional, the Ombudsman in this regard addressed an inquiry to the Ministry of Finance.

The Finance Ministry’s response indicated that work is already underway to introduce a new definition of a structure. The assumptions of this work include:

  • maintaining the fiscal status quo, i.e. that it covers the same objects as the definition currently in use,
  • at the same time, it is to be ensured that the jurisprudence of the administrative courts that applies to the application of the existing regulations on property tax can continue to be taken into account,
  • in addition, consideration is being given to defining a closed catalogue of taxable objects in a new appendix to the Local Taxes and Fees Act.

The ministry also confirmed that the new regulations should be enacted and published no later than this November. Until then, consultations are planned with a wide range of entities that will be affected by the amended regulations. Both taxpayers and local government units will be able to participate.

Link to the full text of the Ombudsman’s speech and the MF’s response: https://bip.brpo.gov.pl/pl/content/rpo-budowla-definicja-podatki-mf-odpowiedz

6. The timing of recognition of the allowance for the Price Difference Payment Fund in tax expenses

The mandatory allowance for the Price Difference Payment Fund is an indirect tax-deductible expense, so it should be recognized when it is incurred.

This was stated by the Director of the National Tax Information in the tax ruling dated 6th March 2024, ref. no. 0111-KDIB1-1.4010.36.2024.1.KM. In doing so, he stressed that making deductions to the fund does not directly translate into generating specific business income. Accordingly, they do not constitute direct expenses. The obligation to make them stems from the provisions of the Law of 27th October 2022 on emergency measures to curb electricity prices and support certain consumers in 2023 and 2024. Among other things, it applies to electricity generators such as the applicant, using photovoltaic and wind farms to generate energy. However, it is explicitly indicated in the aforementioned law that they are deductible costs for obligated entities within the meaning of the Personal Income Tax Act of 26th July 1991 or the CIT Act. They are related to the entrepreneur’s income in an indirect manner. Accordingly, the allowance for the fund is or will be a cost to the company other than directly related to revenue. What follows, therefore, from Article 15(4d) of the CIT Act, the moment when a write-down for the fund is recognized as a tax expense is the moment it is incurred, i.e. the date on which the expense is recognized in the books of account on the basis of documents in the company’s possession.

7. Energy investments without a limit on the cost of debt financing

The Supreme Administrative Court (hereinafter: “SAC“) continues the positive line of jurisprudence on the issue of the absence of a limit on the inclusion in tax costs of debt financing, in the case of investments in renewable energy sources.  This is due to the possibility of qualifying wind and photovoltaic farms as a long-term public infrastructure project.

In the cases concluded by judgements II FSK 10/20 of 20th September 2022, II FSK 1615/20 of 8th February 2023, II FSK 2874/20 of 25th May 2023, the axis of the dispute was the interpretation of “long-term public infrastructure project.” According to paragraph 10 of Article 15c of the CIT Act, it is a project to provide, upgrade, operate or maintain a significant asset in the  public interest. Exclusively for such projects, a CIT taxpayer is entitled to an exclusion of the limit on debt financing costs in deductible expenses. This is an important issue, especially in the case of large investments, such as the construction of RES facilities.

The above SAC judgments were issued as a result of taxpayers challenging negative tax rulings they had received, which were subsequently overturned by the Provincial Administrative Court in Warsaw. In each of them, the Director of the National Tax Information ruled that by the lack of a definition of “public infrastructure” in tax law, reference should be made to the definition of “public purpose” contained in Article 6(2) of the Real Estate Management Act of 21st August 1997. In doing so, he invoked the principle of respecting terminology taken over from other branches of law in the process of interpreting tax law. As a consequence of this interpretation, he concluded that a wind power project is subject to the statutory limit.

However, the SAC did not share this view, stating that it follows from the very definition contained in the Real Estate Management Act that it should not be used, when applying other legislation. Furthermore, he stressed that “public purpose” does not have the same meaning as “general public interest.” Therefore, it is incorrect for the Director of the National Tax Information to link these definitions. According to the SAC, the possibility of qualifying a wind power plant as an investment pursuing the  public interest should be considered through the prism of whether it is a project of value, beneficial or desirable to the collective, serving the public good and satisfying social needs, but independently from the Act on Real Estate Management. At the same time, an investment to ensure the energy security of the state was also considered such a project. Consequently, for the installation of RES, it is possible to apply an exemption to the limit on the cost of debt financing.

8. No VAT on the installation of RES systems and asbestos removal by local government units

The installation of renewable energy systems and the removal of asbestos by local government units (hereinafter: “JST”) is not subject to VAT, according to the general tax ruling of the Minister of Finance of 2nd May 2024. Local governments have until the end of August 2024 to adapt their settlements to the new rulings.

The above general tax ruling was issued as a result of the judgments of the Court of Justice of the European Union (hereinafter: “CJEU”) ref. C-612/21 and C-616/21 on the inconsistency of the previous Polish interpretation of VAT Act regulations with Council Directive 2006/112/EC of 28th  November 2006 on the common system of value added tax. The Polish tax authorities argued that the execution of projects involving installation of RES systems and removal of asbestos by JST constituted a business activity subject to VAT. However, the CJEU ruled that due to the one-off nature of the projects and the fact that the fees received for these purposes from residents did not correspond to the real value of the service, the JSTs were not acting as enterprises whose purpose is to achieve a regular income. Therefore, this is not a business activity subject to VAT.

As a result of the judgments of the CJEU and the subsequent jurisprudence of the Supreme Administrative Court (e.g. judgment of 5th June 2023 ref. I FSK 1454/18, judgment of 5th October 2023 ref. I FSK 1868/18), the Minister of Finance issued a general tax ruling in order to unify the application of tax law by tax authorities. The consequences of the position adopted by the Minister of Finance are:

  • an option for a JST that has heretofore accounted for activities in this area as taxable for VAT to make adjustments to its accounts of output and input tax for previous periods;
  • a possibility to leave past VAT settlements as they are due to the constitutional principle of citizens’ trust in the state;
  • the necessity to verify the so-called “pro-rata proportion” of an entity that performs both economic and non-economic activities;
  • potential necessity to adjust settlements with financing institutions for the installation of RES systems and the removal of products and waste containing asbestos;
  • obligation to adapt VAT settlements to new Minister of Finance approach by the end of August 2024.

Therefore, the assumptions of the general tax ruling provide for a transitional period, upon the expiry of which uniformity of settlements of JSTs in the scope of corresponding projects concerning the installation of RES systems and removal of asbestos is to be achieved. The assurance that there will be no negative consequences for JSTs hitherto incurring VAT on RES and asbestos removal projects ought to be assessed positively. However, it should be taken into account that even minor changes in the factual state may influence the exclusion of the application of the discussed ruling, therefore each case is best analysed individually.

Link to the full tax ruling: https://www.podatki.gov.pl/media/9919/interpretacja-og%C3%B3lna-nr-pt1-8101-1-2023.pdf

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