(2021) Photovoltaics: Operating and selling the system are business income

The tax authorities and fiscal courts treat income from the operation of a photovoltaic system as "income from business operations". But is this really correct? In fact, the operation of a photovoltaic system lacks all the characteristics of a business, such as active participation in the market and competition, own pricing, various customers, the possibility to change the network operator, active involvement of the operator (who actually does nothing).

The operator even lacks a say, as the network operator unilaterally determines the contract conditions. The photovoltaic operator actually has no say. The installation of photovoltaic systems is also approved under building law in purely residential areas where commercial activity is prohibited.

In fact, with photovoltaics, the operator provides a photovoltaic system they have purchased and installed for a fixed period of 20 years, namely for rent (plus VAT) based on the electricity fed in. This is a turnover lease. And this should lead to income from renting and leasing rather than business income. Those who install a photovoltaic system regularly do so because of the expected return.

The 20-year contract period with the regional electricity supplier also shows that it is a medium- to long-term investment, especially since the return is the main focus for investors. Therefore, one could assume that a photovoltaic system leads to "income from renting and leasing" and the sale of the system leads to "other income".

Currently, the Baden-Württemberg Fiscal Court has ruled that the operation and sale of a photovoltaic system constitutes income from business operations (FG Baden-Württemberg, 05.04.2017, 4 K 3005/14).

According to the judges, the operator of a photovoltaic system undertakes an independent, sustainable activity with the intention of making a profit and participates in general economic transactions (§ 15 para. 2 EStG). Participation in general economic transactions requires that the activity is provided for a fee on the market and is externally recognisable for third parties, for example by feeding electricity into the grid of an energy supplier for a fee. Activity for a specific contractual partner is sufficient. The fee can be determined based on success. If the operator produces electricity and sells it to a buyer, this activity exceeds the scope of private asset management.

New simplification rule for small systems

The Federal Ministry of Finance stipulates that for small photovoltaic systems, it can be assumed, upon written application by the taxpayer, that they are not operated with the intention of making a profit. For them, there is generally a tax-irrelevant hobby. This means: For the operation of certain photovoltaic systems, the preparation and submission of an income surplus calculation can be waived. In return, however, losses may not be deducted for tax purposes.

The application also applies for subsequent years. The same applies to the operation of small combined heat and power plants (BMF letter dated 02.06.2021, V C 6 - S 2240/19/10006 :006, BStBl 2021 I p. 722). The principles are:

• The simplification rule applies to photovoltaic systems with an installed capacity of up to 10 kW, installed on owner-occupied or rent-free single and two-family houses, including outdoor installations (e.g. garages), and put into operation after 31 December 2003.
• The rule also applies to combined heat and power plants with an installed capacity of up to 2.5 kW, if the above conditions ("single and two-family houses") are met.
• For the listed photovoltaic systems and comparable combined heat and power plants, it is to be assumed, for simplification reasons and without further examination, upon written application by the taxpayer, in all open assessment periods, that they are not operated with the intention of making a profit. For them, there is generally a tax-irrelevant hobby. The application also applies for subsequent years.
• For assessment periods in which the above conditions do not apply (e.g. in the case of a change of use, expansion of the system beyond the specified capacity), the simplification rule is not to be applied regardless of the taxpayer's declaration. They must inform the relevant tax office in writing of the loss of the above conditions.
• Assessed profits and losses (e.g. in the case of assessments carried out under the reservation of review or provisionally) from past assessment periods that are still open to procedural changes (e.g. in the case of assessments carried out under the reservation of review or provisionally) are no longer to be taken into account. In these cases, an EÜR form for the operation of the photovoltaic system/combined heat and power plant is no longer to be submitted for all open assessment periods.

Does the equity rule also apply to VAT? No, the rule only applies to income tax and not to VAT. Therefore, a VAT return must still be submitted unless the small business regulation has already been applied. In this respect, the benefit of the equity rule is somewhat limited. However, you should check whether you are now classified as a small business and can then also waive the submission of a VAT return. You can choose the small business regulation (§ 19 UStG) for VAT if your turnover in the previous year was not higher than 22,000 Euro and is not expected to be higher than 50,000 Euro in the current year.