The production of electricity from photovoltaic systems is an essential part of the envisioned energy turnaround. The Annual Tax Act 2022 of December 16, 2022 introduced an income tax exemption applicable from January 1, 2022 (cf. § 3 No. 72 in conjunction with § 52 Para. 4 Sentence 27 of the German Income Tax Act (EStG)) for income from the operation of certain photovoltaic systems and a zero VAT rate applicable from January 1, 2023 for the supply and installation of certain photovoltaic systems (cf. § 12 Para. 3 of the German Value Added Tax Act (UStG)).
In the meantime, the German Federal Ministry of Finance has issued corresponding application regulations for both regulations in its circulars dated February 27, 2023 and July 17, 2023; the circular from the German Federal Ministry of Finance dated June 12, 2023 also provides for further formalistic simplifications. We summarize the new legal regulations that apply to both individuals and companies (co-partnerships and corporations).
Income Tax Treatment
For income tax purposes, the operating of a photovoltaic system (consisting mainly of solar modules, inverters, and feed-in meters) with regard to the income from the grid feed-in against payment (including any withdrawals for own consumption) basically generates commercial income within the scope of a commercial enterprise. This is associated with a determination of profit by means of a cash-based accounting. Due to the tax exemption according to § 3 No. 72 EStG, which is to be applied retroactively as of January 1, 2022, such a profit determination is no longer required for the income from the feed-in as well as for the own consumption withdrawals from the operation of certain photovoltaic systems (and thus also the submission of a so-called Annex G for commercial income). As a result, the examination of the intention to make a profit, which was often carried out by the tax authorities in the past, is obsolete. Cases in which the electricity produced is consumed entirely by the company itself and is not fed into the grid in return for payment are not classified as commercial operations due to the fact that the company consumes all of the electricity itself; these cases are irrelevant for tax purposes.
VAT Treatment
Notifications of Gainful Economic Activity
In principle, anybody who opens a (commercial) business must notify the municipality in which the business is established using the officially prescribed form. The municipality then informs the competent tax office without delay (cf. § 138 of the German General Tax Code).
In accordance with the circular of the German Federal Ministry of Finance of June 12, 2023, operators of photovoltaic systems are required to notify the municipality in cases in which
- the operation is limited to photovoltaic systems benefiting under § 3 No. 72 EStG and
- sales tax is not levied on sales from this due to the so-called small business regulation (the sales tax-free leasing of real estate is harmless)
is exempt from the obligation to notify the competent tax office of the commencement of a business activity and to submit the tax registration questionnaire. This simplification rule applies in all cases in which the gainful economic activity was commenced as of January 1, 2023.
Circular of the German Federal Ministry of Finance on the Profit-Making Intention for Small Photovoltaic Systems and Block-Type Combined Heat and Power Systems
In June 2021, the German Federal Ministry of Finance had already issued an income tax simplification regulation on the intention to generate profit when operating smaller photovoltaic systems (max. 10 kW (peak) and block-type combined heat and power systems (max. 2.5 kW), which was replaced by the circular of the German Federal Ministry of Finance dated October 29, 2021. Please refer to our earlier Insight dated November25, 2021.
According to the circular of the German Federal Ministry of Finance of July 17, 2023, corresponding applications for the application of this simplification regulation are no longer available for photovoltaic systems that were put into operation after December 31, 2021. For photovoltaic systems commissioned by December 31, 2021, the deadline for submitting applications is extended to until December 31, 2023.
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