The German Renewable Energy Act ("EEG") came into force in 2000 and allows German residents to become energy producers by installing renewable energy generators and to sell electricity to the grid. The law explicitly aims at increasing the volume of renewable energies in the German energy market to 30% until 2020. As a result, the renewables industry has grown markedly with both domestic and foreign investors investing in EEG installations, such as solar panels and wind turbines.
The taxation of profits and use of losses arising out of an EEG installation is always a relevant consideration for investors. Due to borrowed capital and depreciation an EEG installation tends initially to generate major start-up losses and may not begin to generate profits until a later stage. Whether profits are generated ultimately depends on the life of the EEG installation vis a vis the costs incurred.
Under the EEG, German power supply companies are committed to purchasing energy generated by EEG installations for a period of 20 years. Accordingly, an EEG installation can only be depreciated over a period of 20 years or more. Under certain circumstances, it is possible that the depreciable amount can be increased to 120% of cost for a period of five years from the date of the acquisition of the EEG system.
The most common legal form used in the market in operating an EEG installation is a partnership ("Personengesellschaft") in which domestic and foreign investors are involved as partners. Other than for VAT and trade tax purposes, the partnership itself is not a taxpayer as it is transparent for income tax purposes. Rather, profits and losses are treated as accruing to the partners. Losses that arose to an investor in the initial phase can be offset against an investor's profits from other domestic sources of income provided that no "tax deferral arrangement" is in place. The German legislator considers a tax deferral arrangement to be in place if tax advantages such as losses are created by a pre-arranged scheme. This will be the case if investors are offered a pre-arranged scheme (e.g. catalogue, sales documents etc.) with the possibility of offsetting losses against other incomes, at least during the initial phase. In these circumstances, start-up losses will only be utilisable against future profits of the EEG installation. At present, it is not clear whether this applies to renewable energy funds.
In contrast to income tax, a partnership is not transparent for trade tax purposes and must pay trade tax to the municipality. The German national government and the German Parliament (Bundestag) intend that the municipality in which the EEG installation is located shall be entitled to receive 70% of the trade tax and that the municipality in which the company has its headquarters and in which the employees are located shall be entitled to receive 30% of the trade tax. A similar arrangement is already in place for wind-driven power stations and would be extended to other renewables.
When operating an EEG installation, value added tax must also be considered. A partnership is generally considered to be operating a business for value added tax purposes by virtue of operating the EEG installation. Input tax relating to set-up costs can generally be recovered or set off by the partnership.