NEWSLETTER 07/2007
TAX PLANNING FOR CONSTRUCTION OF WIND ENERGY PLANT
Construction of a wind farm is a costly and organizationally complex undertaking requiring technical, legal and tax analysis in the area of public procurement and investments, even at the preliminary phase of planning. Where such analyses are missing or incomplete, the investment process may be severely affected, and at the very least the costs will rise.
Lack of analysis could put the operators of wind energy plants who built their plants before 2005 at risk of painful financial burdens.
Until 2005, some municipalities charged a 2% real estate tax, but it was calculated not only on the value of the land but also on the value of all the wind equipment, including its most expensive element, the generator. (This controversial subject is addressed e.g. in Province Administrative Court decision no. I SA/Sz 108/04, Supreme Administrative Court judgment no. II FSK 51/2006, and Ministry of Finance letter ruling of 17 March 2007 no. PL-833/35/07/IP/346.)
This method of calculating real estate tax could prove surprising. Due to a change in law, this unfavourable method can no longer be used, and tax planning must be focused on other areas.
At present, real estate tax is calculated against the value of the land and the mast.
VAT on purchase and installation of equipment
The area of VAT on investment expenditures for construction and launch of a wind energy plant requires precise tax planning.
Equipment for such a plant is usually imported to Poland from elsewhere in the European Union, with the manufacturer providing installation in Poland. These activities comprise the majority of costs of an energy plant launch; therefore it is necessary to perform appropriate tax planning for acquisition of the equipment, so that the plant’s operator can avoid paying unnecessary VAT.
Methods of delivery and erection of the plant should be preferred which do not require the operator to make 'physical' payment of VAT and later reclaim it, particularly since some intra-Community transaction schemes allow for sale of wind energy plant supplies that are almost entirely VAT-neutral for the buyer.
It is worth remembering that standard VAT settlement schemes (including domestic schemes) may mean freezing of the VAT charged under the seller’s invoices.
The tax reimbursement procedures of the Polish or foreign tax authorities are very burdensome. Refund is often preceded by a painstaking audit to justify the refund.
Investment financing
The method of financing the construction of a wind farm also requires tax planning. Launch of the first windmills is generally made using the operator’s own funds, because credit facilities are typically not available. Therefore, the future operator of a wind energy plant – for example a Polish joint stock company – may obtain the amount needed for purchase of windmills as equity from its own shareholder. However, this method permanently locks in substantial funds provided to the company, which is designed to operate a business and not to accumulate capital. Therefore, other more flexible methods for financing the investment come into play, such as a loan. It is also worth considering use of methods for launching an energy plant where the company may lease the most expensive plant equipment.
Each of these solutions has advantages and drawbacks from the point of view of the tax law. A loan within the capital group may entail unclear and complex limitations on deductibility of interest by the lender (thin capitalisation rules). On the other hand, for a foreign supplier to lease equipment to an operator in Poland involves significant organisational resources for servicing the cross-border lease.
Mateusz Hołysz
Andrzej Mikulski
The Newsletter is published free-of-charge and is designed chiefly for clients of the law firm of Mikulski & Partners. The articles are written by lawyers at the firm, but do not constitute legal advice.