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Operate photovoltaic systems and combined heat and power units free of tax charges

Many private residential properties have had small photovoltaic systems (PV systems) installed. Moreover, some people also operate small combined heat and power units (CHP unit). A simplification rule issued by the fiscal administration means that, upon application, profits will no longer be taxed. This even applies for previous years insofar as this is still procedurally possible. The Federal Ministry of Finance (Bundesministerium der Finanzen, BMF) has issued a separate circular concerning this.

Generally a commercial activity

By feeding self-generated electricity into the public grids as a result of operating a PV system / CHP unit, normally, taxpayers generate income from commercial operations. The income has to be declared in the personal tax return. This frequently leads to disputes with the fiscal administration, particularly in the case of small systems, because, given the absence of any intention to generate a profit, the initial losses are not recognised.

A situation of Liebhaberei upon request

With a view to preventing such arguments, on the basis of the BMF circular of 2.6.2021 (reference: IV C 6 – S 2240/19/10006:006), the fiscal administration now permits, upon a written application, a wholesale situation of Liebhaberei [a German tax term that refers to a situation where the taxpayer performs an activity without the intention to realise (taxable) profits]; taxpayers will simply have to declare that they have no intention of generating a profit through their activities. This will give rise to a situation of Liebhaberei that is not relevant for tax purposes even if, demonstrably, the aim is to generate profits. Other inspection measures of the local tax office will cease to apply. The possibility to file an application will apply to all tax assessment periods that are not yet final and unappealable.

The affected systems 

The regulations apply to PV systems with installed capacity of up to 10 kilowatts that have been installed on owner-used one-family and two-family house sites, including on outside facilities (e.g., garages), and that were put into operation after 31.12.2003. For the analysis of whether or not the property is an owner-used one-family or two-family house, the potential presence of a home office would not be relevant. CHP units with an installed capacity of up to 2.5 kilowatts that meet the same conditions would be treated in the same way.

Effect of the application

After the application has been filed, the (previous) commercial operations will be deemed to be a situation of Liebhaberei that is not relevant for tax purposes – and, indeed, for subsequent years as well as for periods that have already elapsed. In those years, neither taxable profits nor losses will arise. This applies to any future hidden reserves. Although, if tax assessment notices have already been issued for years that have been assessed then this would only apply insofar as amendments to the year are still procedurally possible. Profits or losses will likewise continue to be upheld only if they have already been taken into account in a tax assessment notice where amendments are no longer possible.

Who would benefit from making an application?

Filing an application would benefit all systems that are actually generating profits. By making an application the rate of return generated from a system would increase because the tax payable would no longer be charged. This would be particularly interesting when, due to depreciation, losses are available in tax assessment notices that are already final and unappealable. In such cases, the losses will be preserved and, after an application has been made, future profits will no longer be taken into account.

Recommendation: However, in the case of comparatively recently installed systems, where losses are still expected to be generated during the next few years, you should initially refrain from making an application. In such a case, first of all, you should try to claim a deduction of the losses against tax. If these losses are incontestably recognised by the local tax office, then, once the system achieves profitability, you should file an application for a situation of Liebhaberei. 

Moreover, an application will reduce your tax declaration obligations. In this respect, there will no longer be any need to enter data in appendix G of your tax return. In particular, it will also mean that preparing the calculation of taxable profit will be unnecessary. The same will apply to the statement illustrating the determination of the bases for the tax assessment in the case of a PV system of a GbR (the acronym for Gesellschaft bürgerlichen Rechts, a partnership under German civil law). 

Please note: You should bear in mind that the application will essentially have no effect on other types of tax such as, in particular, VAT. Accordingly, advance VAT returns and annual declarations will basically still have to be submitted. Submitting these would be unnecessary only if the small business exemption were applied. However, this normally only makes sense for older systems. In the case of more recently installed systems, there could be negative consequences as the input tax deduction, in particular, from the purchase would otherwise be refused.

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