Energy sector: Adaptation of the guidelines to the jurisdiction

Decentralized consumption in combined heat and power plants

In accordance with the KWKG (the law on combined heat and power plants – CHP plants), the operator of a CHP plant also receives remuneration from the grid operator to the extent that he does not feed the electricity into a grid for general supply, but consumes it in a decentralised manner. On this basis, the tax authorities previously assumed a fiction of full feed-in in section 2.5 para. 17 UStAE (administrative guidelines to the German VAT Code), in which the plant operator notionally supplies electricity to the grid operator for VAT purposes, who then notionally supplies the electricity back.

The Federal Fiscal Court (BFH) countered this in its decision V R 22/21 of 11 May 2023, referring to the ruling XI R 18/21 of 29 November 2022, as no power of disposal is transferred between the plant operator and the grid operator with regard to the electricity consumed in a decentralised manner. It can be deduced from the wording and legislative history of § 4 (3a) KWKG and related laws that the CHP surcharge is a subsidy for the plant operator motivated by energy policy, but not a fee. In this respect, the surcharge represents a genuine non-taxable subsidy.

The BMF has included both in the UStAE.

Release of heat from a combined heat and power plant and from biogas plants

If the operator of a combined heat and power plant or a biogas plant does not feed the heat generated into a district heating network and does not allow it to escape unused, but makes it available to a third party free of charge, he must pay VAT on a transaction which must be treated as made for consideration. In such a case, the assessment is primarily based on the purchase price in accordance with § 10 (4) no. 1 of the German VAT Code. If and only if this cannot be determined, the cost price can be considered as the assessment basis.

In its ruling of 9 November 2022 (XI R 31/19), the BFH had to decide a case in which a fictitious purchase price could not be determined. The treatment provided for by the tax authorities, which applied the average district heating price at the same location instead of the pro rata cost price, was inadmissible. If, for example, the plant is not connected to a district heating network, the cost price is decisive. The BMF agrees with this: According to the new release of sec. 2.5 para. 14 UStAE, a notional purchase price is to be recognised if it can be determined without considerable effort. Recognising a district heating price requires a connection to a district heating network.

According to the BFH, the market price method, which is based on an actual or fictitious turnover, should be used to allocate the cost price between the electricity supplied against payment and the supply of heat which must be treated as made for consideration. The energy method previously used by the tax authorities, in which the cost price is divided into kilowatt hours according to the respective quantity of electrical or thermal energy, is inadmissible. The BMF has also adopted this for the standard case.

Commercial balance sheet feed-in

According to the Renewable Energy Sources Act (EEG), the grid operator must purchase and remunerate all of the electricity generated by the plant operator. According to the previous opinion of the Federal Ministry of Finance, the supply of electricity by the operator of a photovoltaic system also included the electricity passed on commercially on a balance sheet basis. In the case of a commercial-balance sheet feed-in, the electricity generated from the electricity generation system is physically fed into a line structure that does not constitute an electricity supply network within the meaning of § 3 No. 16 Energy Industry Act (EnWG), e.g. a customer system. For billing and balancing purposes, both the physical quantities fed into the electricity supply grid and – in the same way – the physical quantities drawn from the electricity supply grid are corrected in the balance sheet as if all the electricity generated had been fed into the electricity supply grid and, accordingly, more electricity had been drawn from the electricity supply grid to cover the electricity consumption in the customer system (including line and transformer losses within the customer installation). The commercial balance sheet calculation approach puts the system operator in the same position in every respect (in his favour but also at his expense) as if he had fed the energy he generated directly into the grid.

In its ruling XI R 18/21 of 29 November 2022, the BFH expressed general doubts as to whether a supply occurs in the case of a commercial balance sheet feed-in. However, it did not have to make a final decision on this, as in the underlying case, the system operator had supplied electricity to a customer system without feeding electricity into the electricity supply grid and withdrawing electricity from the electricity supply grid for accounting purposes. Therefore, there was already no commercial balance sheet feed-in.

The Federal Ministry of Finance responded to this in its letter and now describes the commercial balance sheet feed-in as irrelevant for VAT purposes if the system operator supplies the electricity to its own electricity grid, i.e. to a so-called customer system. In all other cases of commercial balance sheet feed-in (e.g. in closed distribution grids), the outward and return supply still must be assumed for VAT purposes.

Application and non-objection rule

The principles of the letter are to be applied in all open cases. For supplies carried out before 1 January 2026, the previous release of sec. 2.5 UStAE may be applied, also for input VAT deduction. For CHP surcharges in the context of direct marketing, a consideration may be assumed instead of a subsidy for supplies before 1 January 2026 (also for input VAT deduction) if this is agreed between the system operator and the grid operator.

For further details, please refer to the BMF letter.

Classification

The outward and return supplies are particularly problematic for public corporations. Waste disposal companies, for example, carry out an economic activity by supplying electricity. However, they cannot deduct the input VAT from the return supply of the grid operator because the fictitiously repurchased electricity is not used for the economic activity of the outward supply, but for the waste disposal, which is carried out as a public utility. Particularly if there is no right to deduct input VAT, it makes sense to opt out of the taxation of outward and return supplies as quickly as possible, insofar as the BMF letter allows. All tax periods for which a change is still possible under procedural law should be considered. As the grid operator usually invoices both the fictitious outward supply received and the fictitious return supply made in a joint document, system operators must object to the grid operator's self-billing invoices.

However, if the notionally returned electricity is used by the system operator for economic activities, it may be advantageous to make use of the non-objection rule for as long as possible. Each individual case should be examined separately.

As far as the commercial balance sheet feed-in is concerned, the BMF has not fully followed the concerns of the BFH. Anyone wishing to rely on the BFH judgement XI R 18/21 and treat any supplies as non-taxable in the context of commercial balance sheet supply should disclose this to the tax office. It should also be borne in mind that the BFH has not finally ruled on this issue.

Author: Nadia Schulte