Governments around the world are striving to advance the transformation of the existing fossil-nuclear energy system towards a sustainable energy system. Renewable energies are a fundamental part in this process and are expected to take over the major share of energy supply in the future. To achieve this ambitious target, many governments are trying to make investments more attractive by providing good framework conditions for such investments. This includes tax incentives for investment as well as tax measures for ecological steering of consumer behavior.
This Insight is intended to provide a snapshot of the tax framework by governments world-wide, with a focus on the tax measures and incentives in Germany and Spain.
Gigantic Market, but Declining Trend—Need for Action
For a long time the market for renewable energies was characterized by exponentially increasing investments. Between 2004 and 2011, according to United Nations Environment Programme (UNEP) surveys, global investment increased by around 600% (from $45 billion to $286 billion). This investment enthusiasm has so far inspired and supported the ambitious environmental targets of gov-ernments.
Since 2012, however, global investments in renewable energies have been stagnating, and in 2018 were at the same level as in 2011. One of the main reasons given for this stagnation was the considerable fall in prices for solar panels (around 80%) and wind turbines (around 50%) on the world market, and it was initially assumed that the stagnation in investment would not have any direct impact on the global transformation targets. Since the stagnation has continued for almost a decade now, other reasons are likely to play a major role, such as the uncertainties that investors have regarding the regulation of renewable energy sources.
At the same time, political pressure at international level has increased to achieve the environmental targets agreed in the Kyoto Protocol and the Paris Convention. EU The member states therefore bindingly agreed at the end of 2018 that the share of energy from renewable sources in the EU’s gross energy consumption will be at least 32% in 2030 (Article 3 of Directive (EU) 2018/2001).
Although Article 194 of the Treaty on the Functioning of the European Union formulates the promotion of renewable energy sources as one of the objectives of European energy policy, this agreement is particularly noteworthy because the starting points within the EU are heterogeneous. While the share of renewable energies in gross energy consumption in 2018 was about 7% in the Netherlands, about 12% in Poland, Slovakia and Hungary, and about 16–18% in the large economies of France, Germany, Spain, Italy and Greece, Sweden, at about 55% as well as and Finland and Latvia at about 40%, can generate a much higher share of their gross energy consumption from renewable energy sources.
In addition, investment in renewable energy in the EU is not only stagnating in line with global developments but is also showing a sharp downward trend. Investments in renewable energies in the EU have more than halved between 2011 and 2018 (from $130 billion to $62 billion). Even if part of the decline in investment is due to the fall in price of solar panels and wind turbines, this poses challenges for the EU member states.
Tension between Additional Tax Burden and Tax Incentives
A best practice for governments to boost investment in certain sectors is to grant tax incentives because they ultimately increase the profitability of the investment. However, this tool is typically used very cautiously by governments to prevent the loss of tax base. In the EU, this restraint can be partially reinforced by the strict requirements of state aid law.
Another preferred method is the additional tax burden on fossil-nuclear energy sources to facilitate market access for renewable energy sources. However, many countries are pursuing a multi-pronged approach by combining the effects of the additional tax burden on fossil-nuclear energy sources and the simultaneous tax incentives for renewable energy sources. This is intended to create a profitability advantage in favor of renewable energy sources.
In the field of energy and electricity, there is a comprehensive minimum harmonization of the tax structure in the EU through Directive 2003/96/EC. This Directive determines which products are to be subject to harmonized energy or electricity taxation and the possibilities for member states to exempt energy products and electricity from taxation or to apply reduced tax rates of taxation. Article 15 of the Directive provides for the optional possibility of granting favorable tax treatment to electricity produced from renewable energy sources. Several EU member states have made use of this option by exempting electricity from renewable energy sources from taxation under certain conditions. However, also with regard to state aid law, a full exemption was generally not implemented.
In Spain, the implementation of Directive 2003/96/EC has been carried out mainly through Law 38/1992, of December 28, on Special Taxes, which establishes a burden on hydrocarbons, on certain means of transport, and on electricity and coal. By means of this Law, the Spanish government has regulated the taxation of energy and electricity in Spain, incorporating the regulation and levying of these taxes. In Germany, the Directive has also been implemented in various laws, including the Energy Tax Act and the Electricity Tax Act.
With regard to the optional incentives for electricity from renewable energy sources, Germany and Spain follow a similar path. They have established an exemption for electrical energy consumed by the owners of renewable technology electricity production facilities whose installed capacity does not exceed a defined threshold of megawatts (self-consumption scenarios).
The Importance of Intelligent Use of Taxes
In addition to increasing the tax burden on fossil-nuclear energy sources and providing tax incentives for renewable energy sources, the way governments use the taxes levied is invaluable. Used smartly, the tax burden on fossil-nuclear energy sources can be turned into a financing instrument for focusing the expansion of renewable energy sources.
In Germany, for example, investors are granted a fixed feed-in tariff for feeding electricity generated from renewable energies into the public grid in order to minimize investment risks. Possible differences between electricity production costs and the market price are financed by a levy, which all electricity consumers pay through a share of their electricity procurement costs. Following the global approach, these feed-in tariffs are increasingly determined by tenders, which are intended to strengthen the competition. From 2021, the carbon dioxide (CO2) pricing system already in place for the energy sector and energy-intensive industry under the European Emissions Trading Scheme is also to be extended to the transport and building sectors. The German government also wants to reinvest these revenues in climate protection measures.
The measures that the Spanish government is adopting are following this same path. The government is currently considering the introduction of certain taxes aimed at protecting the environment in order to comply with European standards. In particular, one of the measures would be to establish a state tax directly levied on CO2 emissions. In addition, in order to expand renewable energy sources, the Institute for the Diversification and Saving of Energy (IDAE), which is a public business entity affiliated to the Spanish Ministry for Ecological Transition, has been developing a series of specific aid programs in the renewable energy sector for energy producers and traders.
Finally, fixed feed-in tariff systems are currently being substituted in Spain by “Power Purchase Agreements” (PPAs) for renewable energy. A PPA is a long-term contract between a consumer and a producer of renewable energy or between a producer and a trader, to buy electricity from renewable sources at a fixed price, on agreed conditions and for a pre-established period of time. There are several reasons why PPAs are being widely introduced, such as the ability to establish better control over costs and final sales prices, and, above all, to comply with the European guidelines on policy goals and objectives for the whole of the EU in regard to energy produced by renewable sources.
Tax Implications in the Structuring of Acquisitions
The tax incentives for renewable energy investments relate to the target and thus affect the profitability of the investment as such. In principle, they do not influence the tax structure of the investment. Rather, the tax structuring of the investment in renewable energies depends on factors that are typical for tax structuring, e.g. how the target is financed, whether it is to be held for the long term or sold in the short term. The different taxation systems (transparent and non-transparent taxation) at local, national and international level must be reconciled for a tax-optimized structure.
In the case of an inbound investment in Germany, transparent taxation at local and national level—traditionally through the involvement of partnerships—can prove advantageous in order to be able to take account of the initial losses in a tax-reducing manner. At the international level, this could be combined with a non-transparent unit usually located in Luxembourg or the Netherlands. However, a non-transparent structure at all levels is also conceivable. In this respect, the usual tax considerations for structuring should be taken into account.
In Spain, inbound investments related to renewable energy projects are usually constituted by means of the incorporation of new Spanish non-transparent entities. These special purpose vehicles (SPVs) are specifically created to undertake the individual projects, their only purpose being to generate energy from renewable sources. The SPV, which usually adopts the legal form of a Sociedad Limitada (limited liability company) might be directly or indirectly held by the foreign investors.
This structure allows more transparent and separate management from the other activities or investments that the investors may have, and of course, limits the eventual losses that might be incurred in the development of the project. Likewise, the Spanish SPV, as the owner of the project, will carry out all the procedures to obtain permits, raise the necessary funds and agree on all necessary contracts with the public institutions and private entities. In addition, the SPV, as a newly constituted company, might benefit from certain tax reliefs established on local taxes, such as business activity tax, during the first two years from the commencement of its activity (subject to certain requirements).
Special Tax Rules
In some cases, national regulations provide for certain privileges that consider the specifics of structuring a transaction in the renewable energy sector. This concerns, for example, the mandatory unbundling of energy producers and network operators under energy law. In this regard, German law provides for special rules on unbundling which are intended to ensure the fiscal neutrality of the unbundling. They contain exemptions from tax liability for unbundling based on energy law under certain circumstances and, in the case of transformations relevant to tax law (spin-offs, splits, spin-offs or partial transfers), they simulate the fiction of a required partial operation with the possibility of carrying forward the book value.
Further Steps Might be Necessary
In recent years, important foundations have been laid for energy transformation. In view of the trend towards declining investment, it is safe to say that governments should take courage and take further steps in the right direction to achieve environmental goals set. Tax measures can also make a significant contribution to this: the use of intelligent tax systems and the correct use of tax revenue are invaluable. Equally important, however, is addressing the existing uncertainties in the area of regulation through clearer and more investment-friendly regulations.
Heino Büsching is a Partner and Toufic Schilling is an Associate with CMS Hasche Sigle; Marta Burgos Murillo is an Associate and Diego de Miguel is a Partner with CMS Albiñana & Suárez de Lezo.
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.