Solar investments are capital investments whose return is based on generating electricity from solar power and which also have a reduced risk profile due to the legally regulated feed-in tariff.

Solar investments have been very popular with institutional investors for years. In addition to large-scale direct investments in photovoltaic systems near motorways, on large open spaces or roofs, there are now a large number of indirect investment opportunities via funds or securities that offer investors the prospect of attractive returns in the current zero interest rate environment.

But how are solar investments taxed? Can tax advantages also be utilised with solar investments? The answer initially depends on the form of investment. Indirect investments in the form of funds or securities provide the private investor with capital gains that are taxed at the flat-rate withholding tax rate of 26.375% (including solidarity surcharge). Financing costs in connection with the acquisition of the equity investment are not tax-deductible in this case.

In contrast to this, the tax treatment of solar energy systems is different.Directinvestments are completely different for private investors: With his investment, the investor becomes a commercial and VAT entrepreneur (energy producer) and generates income from commercial operations for tax purposes. This initially means that the income is subject to the progressive tax rate (up to 47.48%). However, the investor can also claim business expenses. This applies to financing costs, but also in particular to depreciation, which can be claimed to reduce tax. Solar installations (even if they are permanently installed) qualify as depreciable movable fixed assets.

Under certain conditions, investors have three different depreciation options at their disposal, which can also be combined:

  • Investment deduction amount (so-called IAB): For the future purchase of the solar installation up to 40 per cent of the expected acquisition costs can be deducted to reduce profits. The assessment bases for current depreciation and special depreciation (see below) are reduced accordingly.
  • Special amortisationIn the year of acquisition or in one of the four subsequent years, a total of 20% of the acquisition costs (possibly reduced by an IAB) can be written off against tax. Within this period, the distribution of the 20% can be freely chosen. After utilisation of the special depreciation allowance, but at the latest at the end of the five-year preferential period, the straight-line depreciation (see below) must be recalculated. It may therefore be advisable not to utilise the full special depreciation allowance at the beginning in order to delay the correction of straight-line depreciation.
  • Straight-line amortisationThe acquisition costs of the photovoltaic system (reduced by IAB and special depreciation, if applicable) can be depreciated over 20 years to reduce tax.

The above-mentioned amortisation options regularly result in a tax loss at the beginning of the investment, which can be offset against other positive income (e.g. from non-self-employed work). This results in an initial tax saving, which in many cases can be used to finance the investor's entire equity investment.

The amortisation options should be planned and used flexibly in each individual case to ensure that the investor can achieve the maximum tax saving depending on their other income.

Example: Investment 2017: 100,000 euros acquisition costs for a photovoltaic system

  • VZ 2016Investment deduction: 40%, i.e. EUR 40,000, which will have a tax-reducing effect in 2016 by offsetting against positive other income. Tax saving (at a tax rate of 45%): EUR 18,000.
  • VZ 2017:

- 20% Special amortisation: EUR 12,000 (20% of EUR 60,000)
- 5% straight-line depreciation: EUR 2,400 (1/20 of EUR 48,000)
- Tax savings: EUR 6,480 (0.45 x EUR 14,400)

In the example, the tax savings in the year before the investment and in the year of the investment total EUR 24,480 or approx. 25% of the acquisition costs. Such a massive shift of expenses for tax purposes is reminiscent of earlier special depreciation allowances in the new federal states. Under current tax law, this depreciation can no longer be realised in the area of other capital or tangible assets.

The Value added tax of 19%, which is attributable to the purchase price for the photovoltaic system, is immediately refunded by the tax office. To do this, the investor must waive the VAT exemption for small businesses, which involves some tax declaration work, but pays off considerably in economic terms.

ImportantIn the case of freelancers, the tax structure of the investment deduction naturally requires special coordination with the tax advisor of the interested party in order to avoid the risk of the freelance activity being infected with trade tax.

Dr Thomas Elser and Tobias Stiegler are tax advisors at TAXGATE, a tax law firm specialising in transactions, investments and tax compliance.