Electricity from your own roof?
Photovoltaic (PV) systems have become very attractive as an investment thanks to tax advantages in sales tax and income tax. We explain which tax benefits you can claim as a result of the changes in the law as of January 1, 2023, and help you with your tax return.
Before we get to WHO and HOW you can benefit from the new legal changes in tax terms, let’s first look at WHAT is actually being taxed. The aim of the legislator is to accelerate the energy turnaround and the increased expansion of renewable energies through the increased installation of photovoltaic systems on owner-occupied or rented properties.
The previous income tax and sales tax obligations associated with the installation and operation of solar systems were recognized by policymakers as unnecessary hurdles, and the tax incentive beginning in 2023 is a complete tax exemption for smaller Photovoltaic systems on private house roofs or even on the balcony of a rented apartment (balcony power plants).
Under the new Section 3 No. 72 EStG, income and withdrawals from the operation of photovoltaic systems existing on single-family homes and outbuildings or other buildings with an installed gross capacity of up to 30 kW or up to 15 kW per residential or commercial unit, up to a total of 100 kW per taxpayer, are tax-exempt. Means that even tenants of a residential unit without their own roof can benefit from the tax incentive, which is rather casually called a balcony power plant. Outbuildings include garages and carports, even garden sheds or sheds are recognized by law as eligible if a PV system is mounted there.
An apartment building with 5 apartments and a store or office would still fall under the power limit of 100 kW per co-entrepreneur with an installable power of 6x 15 kW.
For an expansion of renewable energies in the sense of the energy turnaround, the largest possible number of newly installed solar systems on as many privately owned properties as possible is needed. Therefore, the group of eligible persons who can benefit from the tax exemption has been defined as broadly as possible.
Neither a single-family house nor condominium ownership is required; those who have space for a PV system and the courage to invest can benefit from the tax advantages.
The question of the operator of the facility is therefore not relevant for tax purposes, so private tenants are eligible as beneficiaries, as are owners, owners‘ associations, cooperatives or even rental companies.
One of the legal consequences of the new tax exemption is often overlooked but is enormously important for private individuals:
Because they are now no longer entrepreneurs with the operation of the photovoltaic system, a determination of profits in accordance with § 3 No. 72 S. 2 EstG is no longer necessary because the income generated from the operation of the photovoltaic system is tax-free in total.
The submission of an Annex G with Annex EÜR is therefore also no longer required. This little-known fact alone could encourage many consumers to invest in a solar system now.
People who generate their own electricity usually want to use it themselves.
In principle, the legislator allows PV system operators to choose whether they consume the electricity themselves or feed it exclusively into the public grid.
Self-consumption systems with a capacity of up to 10 kilowatt-peak (kWp) that have gone into operation since July 30, 2022, will then receive 8.2 cents per kilowatt-hour (kWh) of energy fed into the grid for the year of commissioning and for another 20 years beyond that.
Larger systems receive the guaranteed price for the first 10 kWp, and a remuneration rate of 7.1 cents for a system output of up to 40 kWp. Those who choose to feed 100% of the electricity generated into the public grid will be handsomely rewarded:
For systems with full feed-in of solar power, there are 13 cents per kWh for the first 10 kWp output and 10.9 cents per kWh beyond that up to 100 kWp output.
Because the electricity required for self-consumption must of course also be purchased in full, every operator should calculate in advance once a year which model – self-consumption system or full feed-in – is the more advantageous.
The tax exemption always applies regardless of the actual use of the electricity generated. Accordingly, the tax exemption does not only apply to income from feeding solar power into the public grid; income from charging a private or business e-car is also exempt from income tax.
Withdrawals of electricity for private consumption and supplies to tenants are also fully tax-exempt.
Furthermore, it is irrelevant for the tax exemption whether the PV system was purchased or merely rented or leased.
§ Section 3 No. 72 EStG does not distinguish between purchased, rented or leased equipment owned by the operator. Ergo, income from a facility that is only rented or leased is equally exempt from tax.
The zero tax rate, i.e. a sales tax of zero percent, is a new tax rate in the UstG and an absolute novelty in German sales tax law. Previously, there was only the standard tax rate and a reduced tax rate in clearly regulated and usually well justified exceptional cases. In addition, tax-exempt transactions without the possibility to deduct input tax were the rule, but there were also exceptional tax-exempt transactions that nevertheless allowed the deduction of input tax. However, the expansion of renewable energies is so important in terms of environmental policy that operators of photovoltaic systems should also be exempt from burdensome bureaucracy in the area of sales tax.
This is the reason why in the new VAT Act in § 12 para. 3 a tax rate of 0% was introduced for the supply of photovoltaic systems.
The background to this new regulation can also be found in German tax law: Anyone who had decided to purchase a photovoltaic system and install it on the private roof of a house became, in most cases, a small business owner (under the small business regulation pursuant to § 19 UStG).
In certain cases, however, it may be fiscally advantageous to waive this very small business regulation and to book a financial advantage by reimbursing the input tax on the purchase of a PV system. However, this entailed onerous obligations such as the submission of advance sales tax returns and annual sales tax returns. At this point, the new regulation now becomes understandable: with the zero tax rate, one receives the plant at the net purchase price and does not have to pay any sales tax at all. Therefore, one can continue to use the small business regulation, because the input tax deduction would no longer bring a financial advantage when purchasing a photovoltaic system.
In addition, there is no taxation of own consumption and the bureaucratic obligations are significantly lower.
Due to the amendment of the EU VAT Directive 2022/542, member states may, according to Art. 98 para. 2 for up to seven services and supplies referred to in the Ordinance tax rates of less than 5% optionally establish a tax exemption with the right to deduct input tax.
For the end user, this is intended to provide improved access to environmentally friendly energy sources, this applies in particular to the purchase of solar panels, which should promote the use of energy from renewable sources in the EU.
Because laypersons are often not fully aware of what is really exciting about this new regulation, namely the practical effects of the zero tax rate, here are the main effects once again, all of them advantages for taxpayers:
1) The supply of the PV system is taxable and taxable, but taxed at 0%.
2) The supplying entrepreneur retains the full input tax deduction for its input services.
3) No sales tax for all service recipients according to the small business regulation.
If the small business regulation is actually applied, there is another advantage in addition to the reduced administrative burden, namely the elimination of the taxation of own consumption as a gratuitous transfer of value. With so many tax giveaways, it would be almost surprising if these new regulations did not trigger a boom in solar installations.
The only remaining risk is that of incorrect VAT reporting in terms of timing, as the zero tax rate only applies to supplies made after December 31, 2022. Anyone who has already reported the zero tax rate for supplies and installations before this date and has not collected input tax from the customer risks a hefty back payment from their own pocket. If in doubt, it is best to seek advice here from a professional in the tax team.
The time of performance, i.e. from when the delivery or installation of the photovoltaic system is deemed to have been carried out, is also regulated by law.
Here, the contractual agreements in the individual case are the decisive factor: What obligations does the contractor have to fulfill so that the service owed is rendered? The contract for the purchase of a photovoltaic system usually includes both delivery elements and service elements.
The delivery of solar modules and their installation are deliveries of work and are deemed to have been carried out as soon as the customer has been “provided with the power of disposal over the work created” (see Section 3 (1) UStG). These are usually the handover and acceptance of the work!
Very important is the timing of the application of the new rules, a change that only made it into the new law at the last minute. The application was namely brought forward to 1.1.2022, Section 3 No. 72 EStG thus applies to all income and withdrawals generated or made after 31.12.2021 (Section 52 (4) EStG).
The date of commissioning of a photovoltaic system is irrelevant from a tax point of view; the tax exemption therefore also applies to old and existing systems that were commissioned before January 1, 2022. This retroactive tax exemption was hailed by many experts as a minor sensation that impressively demonstrates our government’s enormous pressure to act on the energy transition.
A distinction is now officially made between old plants and new plants:
Old systems are all solar systems that were installed and went into operation before Jan. 1, 2022.
New plants are characterized by the fact that they were not installed until Jan. 1, 2022, but in some circumstances investment deduction amounts were already set up for them in 2021.
Whether or not such investment deduction amounts can then also be released tax-free is still a matter of dispute in specialist circles; no concrete specifications or decisions have yet been made by the tax authorities.
Some operators decide to expand the photovoltaic system with a storage tank, from an income tax point of view, this can represent both private assets and business assets. The case is clearly regulated as soon as a technical inverter comes into play, which converts the direct current generated into alternating current suitable for the grid.
If the storage unit is already installed before the inverter, i.e. DC-coupled, the storage unit is a dependent component of the photovoltaic system from an income tax point of view and must therefore be depreciated together with the system.
If, on the other hand, the storage unit is installed after the inverter and the system is thus AC-coupled, this is technically referred to as a hybrid storage unit, which in turn makes the storage unit an independent asset from an income tax perspective.
Such hybrid storage systems are then to be depreciated with a useful life of 10 years in the hope that actual use will actually be possible for that long.
Finally fill up for free? When the sun shines during the day, the e-car is charged free of charge in the garage, i.e. refueled at zero cost! What a dream! However, this can become a tax nightmare for laypersons if the e-car is a company car (for business and private use) and the electricity comes from the employee’s PV system.
For income tax purposes, a withdrawal of electricity for charging the company car until 2021 constitutes a withdrawal that must be assessed with a withdrawal value in the tax return. As of the 2022 assessment period, the withdrawal is tax-free in accordance with section 3 no. 72 of the German Income Tax Act (EStG).
There are no further consequences for small entrepreneurs with regard to sales tax. If, on the other hand, the standard taxation was applied for the procurement of the photovoltaic system, the withdrawal of the electricity is deemed to be a gratuitous transfer of value, which is to be valued at the replacement cost.
If the employer reimburses the employee for the cost of charging the company e-car, this is a tax-free reimbursement of expenses in accordance with Section 3 No. 50 of the German Income Tax Act (EstG). The employee’s current is assessed as a payment due to the employment relationship.
The plight of skyrocketing energy prices and real as well as looming climatic changes combine to create enormous political pressure for action. The legislature has legally adopted a very comprehensive and effective promotion of solar systems, which only develop their full effect in tax terms. It should be noted here once again that the
AUTHOR: Dipl. oec. Claudia Jenewein, tax consultant
EXPERIENCED: Sebastian Schießling, Tax Consultant