Tax Treatment of Photovoltaic Systems

The tax exemption pursuant to § 3 No. 72 EStG applies to income from the operation of certain photovoltaic systems on, at or in

• single-family houses (including outbuildings, e.g. garden houses, garages, carports) or non-residential buildings (e.g. commercial property with a commercial unit, garage property) with an installed gross capacity of up to 30 kW (peak) as well as
• other buildings (with several residential and/or commercial units) with an installed gross capacity of up to 15 kW (peak) per residential or commercial unit.

In each case, the gross capacity according to the market master data register is decisive.

Pursuant to the circular of the German Federal Ministry of Finance of July 17, 2023, it is not required that the operator of the photovoltaic system is also the owner of the building on, at or in which the photovoltaic system is located.

For the tax exemption, the law also allows the operation of several systems of up to a maximum total of 100 kW (peak); the 100 kW (peak) exemption limit is to be verified per taxpayer or per joint venture. For this purpose, the relevant outputs of all photovoltaic systems benefiting under § 3 No. 72 EStG, which are operated by the taxpayer or by the co-entrepreneur on, at or in buildings, are to be added for the determination of the 100 kW (peak) limit. This shall be applicable both to systems located on the same property and to systems located on different properties. It is irrelevant whether the systems are technically separate from each other.

The tax exemption under § 3 No. 72 EStG covers income generated irrespective of the use of the electricity that is produced by the photovoltaic system. This includes, in particular, the feed-in tariff, payments for other electricity supplies (e.g. to tenants) and payments for charging electric or hybrid electric vehicles. In addition, withdrawals for non-business purposes are to be included. This may include, for example, the use of the electricity generated by the photovoltaic system in the rooms used for own residential purposes or for charging the private electric or hybrid vehicle in addition to the partial feed-in to the grid.

Conversely, all operating expenses that are directly and economically related to the operation of photovoltaic systems benefiting under § 3 No. 72 EStG are not deductible in accordance with § 3c Para. 1 EStG.

If a photovoltaic system is sold or withdrawn from a business that only generates tax-exempt income and withdrawals pursuant to § 3 No. 72 EStG, the resulting profit or loss also falls under the tax exemption of § 3 No. 72 EStG. However, if the photovoltaic system is part of another business, the sale or withdrawal of the photovoltaic system is likely to be taxable

If a photovoltaic system is part of the business assets of a business that does not exclusively maintain photovoltaic systems eligible for tax relief pursuant to § 3 No. 72 EStG, the tax exemption is only applicable pursuant to the circular of the German Federal Ministry of Finance of July 17, 2023 to the extent that income is generated from the electricity produced when it is fed into the grid, withdrawn or sold to third parties.

When the electricity generated by a photovoltaic system is partly consumed in another business of the operator, it is to be assessed according to the overall view of the circumstances in the individual case, taking into account the view of the market, whether two independent businesses or a single business are involved. The clarification of this question is, among other things, significant for the scope of accounting, i.e. whether independent profit calculations have to be carried out for one business or two businesses. In this context, it is likely that a single business is intended in many cases. This can only be assumed if the two operations support and complement each other. An important indication of this is if more than 50 % of the electricity generated by the photovoltaic system is consumed in the other business.

In the event that companies exclusively operate photovoltaic systems exempted under § 3 No. 72 EStG, they are no longer engaged in a commercial activity with the intention of generating a profit and thus a projected total profit. Therefore, they may no longer claim an investment deduction amount pursuant to § 7g EStG for fiscal years after January 1, 2022.

Investment deduction amounts from previous fiscal years that have not yet been reversed with an effect on profits up to and including December 31, 2021 must be reversed in the case of an investment in photovoltaic systems benefiting from tax relief pursuant to § 3 No. 72 EStG (cf. § 7g Para. 3 EStG). However, this is not uncontroversial with regard to the wording of the law and the systematics of § 7g EStG for a system purchased from January 1, 2022 to November 30, 2022 that is now tax-exempt. This is because the taxpayer is likely to have had a regular intention to make a profit before the Annual Tax Act 2022 was passed in December 2022 and could not have expected a corresponding change in the law before § 3 No. 72 EStG was included by the Finance Committee on November 30, 2022. In the literature, therefore, a fairness regulation is suggested, for example, to be able to transfer the correspondingly formed investment deduction amount to such systems. Since the circular of the German Federal Ministry of Finance dated July 17, 2023 does not provide for such a fairness regulation, the taxpayers concerned should first file an application for fairness against an increase in profits resulting from the reversal of the investment deduction amount and the associated assessment of interest on arrears.

Insofar as the photovoltaic system is a business asset of a business whose purpose is not only the generation of electricity from photovoltaic systems, the general regulations on investment deduction amounts pursuant to § 7g EStG shall continue to apply.

Should an asset-managing partnership also generate commercial income in addition to its actual income, the statutory fiction pursuant to § 15 Para. 3 No. 1 EStG, according to which it must pay tax on income from commercial operations to the full extent (so-called “Abfärbung”), applies in principle. However, according to the third sentence of § 3 No. 72 EStG, this does not apply if such a partnership, in addition to its actual income, generates exclusively tax-exempt income within the meaning of § 3 No. 72 EStG.

Important: This provision may result in a partnership losing a previous commercial infection with the amendment of the law. In principle, this is associated with a cessation of operations, and hidden reserves must be disclosed. This is confirmed by the German Federal Ministry of Finance in its circular of July 17, 2023, which states that in such cases all assets, in particular the buildings on, at or in which a photovoltaic system is located, must be removed in 2022 with the consequence of taxation of hidden reserves.

However, in order to avoid this disadvantageous legal consequence, a withdrawal is refrained from for reasons of protection of confidence if the entanglement of the hidden reserves can be restored for other reasons by December 31, 2023. Therefore, in particular in cases of an asset-managing partnership that was previously commercially infected due to the operation of a photovoltaic system and that now generates tax-free income from this due to the provision of § 3 No. 72 Sentence 3 EStG, urgent action is required by December 31, 2023 in order to avoid taxation of the hidden reserves as of January 1, 2022. For this purpose, either a new commercial infection (cf. § 15 Para. 3 No. 1 EStG) or a commercial characterization (cf. § 15 Para. 3 No. 2 EStG) should be examined.

Vice versa, asset-managing partnerships can now acquire a photovoltaic system without a commercial infection of their otherwise only asset-managing income according to § 15 Para. 3 No. 1 EStG (cf. § 3 No. 72 Sentence 3 EStG).

Provided that a commercial enterprise is still established: Photovoltaic systems that are set up as so-called rooftop systems with a substructure on the roof are regularly used entirely for the commercial operation of generating electricity and are therefore to be regarded as operating equipment and thus as independent, movable assets. In its circular of the July 17, 2023, the German Federal Ministry of Finance now also treats roof-integrated photovoltaic systems, which in terms of valuation law belong to the building components (because they replace the roof), “like” operating equipment for income tax purposes. Thus, both roof-mounted systems and roof-integrated photovoltaic systems can be depreciated on a straight-line basis over 20 years in accordance with their normal useful life according to the official depreciation table.

If no commercial enterprise is (any longer) established: The labor costs incurred during the installation of a photovoltaic system constitute a craftsman’s service. In accordance with the circular of the German Federal Ministry of Finance dated on July 17, 2023, the tax reduction within the meaning of § 35a Para. 3 EStG is therefore to be granted if the other requirements are met.

Nevertheless, the circular of the German Federal Ministry of Finance leaves open whether and to what extent a tax reduction can be claimed for energy measures in buildings used for own residential purposes (cf. § 35c EStG).

The zero tax rate to be applied as of January 1, 2023 in compliance with § 12 Para. 3 UStG applies to

• the supply, intra-Community acquisition and import of solar modules to the operating company of a photovoltaic system,
• including the components essential for the operation of a photovoltaic system, any storage facilities for the electricity generated with solar modules, and any related installations.

In order to be able to apply the zero tax rate accordingly, the photovoltaic system must be installed on or near private residences, apartments, and public and other buildings used for activities serving the public good.

Mere commercial buildings or commercial complexes are not eligible; consequently, the standard tax rate of 19 % is to be applied. If a building is used for both tax-privileged and non-tax-privileged purposes (e.g. partly for residential purposes and partly for commercial purposes), it must generally be assumed to be a tax-privileged building. This shall however not apply if the harmless use is so much less important than the harmful use that it would not be appropriate to apply the preferential treatment.

The above conditions are deemed to be met if the installed gross capacity of the photovoltaic system does not exceed or will not exceed 30 kW (peak) according to the market master data register. Pursuant to the circular of the German Federal Ministry of Finance of February 27, 2023, this regulation represents a simplification pertaining to the examination of the type of building; thus, the providing entrepreneur does not have to ensure that the solar modules, essential components, or storage units are installed on a property benefiting from the tax.

In case of a gross output of more than 30 kW (peak) per unit, an application of the zero tax rate is linked to further verification requirements.

In particular, grid-connected photovoltaic systems and non-grid-connected stationary systems (so-called stand-alone systems) are subject to the zero tax rate. For simplification reasons, the circular of the German Federal Ministry of Finance of February 27, 2023, assumes that solar modules with an output of 300 watts and more are used for grid-connected systems or stationary stand-alone systems.

In addition to the delivery of solar modules, essential components or storage units classified as main service, certain ancillary services such as usually the assumption of the registration in the market master data register or the provision of software for the control and monitoring of the system may be incurred. These and similar ancillary services are also subject to the zero tax rate due to a uniform treatment. Maintenance or repair work without the supply of beneficiary system components, on the other hand, is subject to the standard tax rate of 19 %.

The leasing of photovoltaic systems does not constitute a supply of photovoltaic systems and is therefore also subject to the standard tax rate of 19 %; leasing or hire-purchase agreements may have to be assessed separately.

The entrepreneur supplying the photovoltaic system must prove that the above requirements for the application of the zero tax rate are met. For this purpose, according to the circular of the German Federal Ministry of Finance of February 27, 2023, it is sufficient if the purchaser declares that he or she is the operator of the photovoltaic system and that it is either a subsidized building or that the installed gross capacity of the photovoltaic system does not exceed or will not exceed 30 kW (peak) according to the market master data register. For this purpose, the providing entrepreneur will usually use a declaration form, which the operator has to fill out and sign accordingly.

The German Federal Ministry of Finance, however, provides for a simplification rule in this respect. According to this rule, the obligation to provide proof does not apply if the output of the photovoltaic system does not exceed 600 watts. In practice, any obligation to provide evidence for the sale of solar modules is therefore waived if the individual solar modules have an output of more than 300 watts (see above, since they are used as grid-connected systems or stationary stand-alone systems) and the photovoltaic system has an output of up to 600 watts.

The charge for feeding the electricity generated by the photovoltaic system into the grid (including any withdrawals for own consumption) is subject to VAT (as before). However, if the electricity feed-in is the only entrepreneurial activity, the so-called small business regulation will usually apply.

In order to be able to claim the input tax deduction from the acquisition of the photovoltaic system, an option to the so-called standard taxation was required in these cases in the years prior to January 1, 2023. Since the supply of solar modules, for example, will be subject to the so-called zero tax rate (cf. § 12 Para. 3 UStG) from January 1, 2023, small entrepreneurs will no longer need to opt for standard taxation.

For the taxation of value added as benefit in kind in connection with the operation of a photovoltaic system, a distinction must be made depending on when the photovoltaic system was acquired.

An entrepreneur could fully assign a photovoltaic system acquired before January 1, 2023 to his business. If he or she had waived the application of the small business regulation, he or she was entitled to a full input tax deduction from the acquisition. The privately consumed electricity was subject to taxation as a so-called benefit in kind, whereby the legally permissible input tax deduction was offset downstream in accordance with the system. In these cases, a benefit in kind will continue to be taxable after December 31, 2022.

The removal or benefit in kind of a photovoltaic system that was acquired prior to January 1, 2023 and that was entitled to a full or partial input tax deduction will also (continue to) be subject to VAT as a benefit in kind after December 31, 2022. Nevertheless, it is possible to apply the zero tax rate in this respect. The prerequisite for this is that the system already installed meets the other requirements for the application of the zero tax rate pursuant to § 12 Para. 3 UStG and the entrepreneur intends to use more than 90 % of the electricity generated with the system for non-business purposes in the future. This is assumed for simplification reasons if part of the electricity generated with the photovoltaic system is stored in a battery.

The transaction of withdrawal or gratuitous benefit at zero tax rate does not constitute a change of circumstances pursuant to § 15a UStG and consequently does not trigger an input tax adjustment. An entrepreneur who originally waived the application of the small business regulation for the purpose of claiming the input tax deduction from the acquisition of the photovoltaic system and now withdraws the photovoltaic system at the zero tax rate, however, continues to be bound by the five-year commitment period of the waiver. Accordingly, the supply of the electricity to the grid operator continues to be subject to the standard tax rate of 19 % until the expiry of this commitment period.

If an entrepreneur acquires a photovoltaic system after January 1, 2023 using the zero tax rate, there is no need to deduct input tax due to the lack of tax accrual (tax rate = 0 %). Unlike in the case of an acquisition before January 1, 2023, no downstream compensation of an input tax deduction is therefore required for a system-compatible result. Therefore, in these cases, there is also no taxation of a free transfer of value. The withdrawal or gratuitous donation of a photovoltaic system acquired on or after January 1, 2023 using the zero tax rate also does not constitute a gratuitous transfer of value.