Decentrally consumed electricity from CHP plants does not constitute a supply and return supply

BFH ruling V R 22/21 of 11 May 2023
In its ruling of 29 November 2022 (XI R 18/21), the XIth Senate of the Federal Fiscal Court (Bundesfinanzhof, BFH) had already decided that the obligation of the grid operator to also pay a surcharge for decentrally consumed electricity in accordance with the Act on the Maintenance, Modernisation and Expansion of Combined Heat and Power Generation (Gesetz für die Erhaltung, Modernisierung und den Ausbau der Kraft-Wärme-Kopplung, KWKG) does not imply a supply and return supply of the electricity. The Vth Senate has now stated that it is in agreement. The contrary view of the tax authorities (section 2.5 paragraph 17 of the UStAE, the VAT Application Decree) can therefore no longer be upheld.

Previous administrative interpretation: supply and return supply

For companies that generate electricity and heat in CHP plants, for example at their own plant, the CHP surcharge is economically significant. § 4 (3a) KWKG 2009 stipulates that the operator of a CHP plant is entitled to a surcharge from the grid operator even if he does not feed (all) the electricity into the general supply grid but rather consumes it himself. The tax authorities therefore concluded that in cases where there is a decentralised consumption of electricity by the plant operator (who receives a CHP surcharge), the plant operator is supplying the decentrally consumed electricity to the grid operator who then supplies it back to the plant operator (section 2.5, paragraph 17 UStAE). Both the full feed-in and the return supply are thus subject to VAT so that the CHP surcharge on self-generated and consumed electricity by the plant operator is also subject to VAT.

BFH: No supply

In the opinion of the BFH, this view is wrong - the Vth Senate agrees with the detailed reasoning of the XIth Senate of 29 November 2022 (XI R 18/21). With regard to decentrally consumed electricity, there is no supply to the grid operator and accordingly no return supply to the plant operator. A supply did not necessarily require that the recipient could physically dispose of the supply item. What is necessary, however, is the transfer of substance, value, and revenue within the scope of the acquisition of the power of disposal, which also includes, among other things, that the recipient can sell the supply item. These requirements were not met in the present case, as no electricity was fed into the grid of the grid operator.

Admittedly, § 1 para. 1 no. 1 sentence 2 of the UStG provides that sales that are (only) deemed to have been carried out by virtue of legal order may also be taxable. However, § 4 (3a) KWKG 2009 does not establish such a legal fiction. From the wording and the history of the origins of this and adjacent provisions of the KWKG, it can be concluded that the KWK surcharge is a subsidy for the plant operator motivated by energy policy, but not remuneration. The BFH thus rejected the fiction of a full feed-in and subsequent return for VAT purposes.

In an obiter dictum (i.e., in a side note that is not relevant to the specific case to be decided), the XIth Senate also took the view that even in the case of a “commercial-accounting” feed-in (“kaufmännisch-bilanzielle Einspeisung”), electricity supply is not to be assumed. The commercial-accounting feed-in is, in turn, an energy-economic fiction according to which plant operators can assume the complete feed-in of the generated electricity for the purpose of receiving a subsidy (e.g., EEG or KWKG), even if this fiction represents a deviation from the actual physical circumstances. This calls into question the continued applicability of section 2.5 (2) UStAE, which also wants to fictitiously assume a supply in this respect.

Practical impact

Even though the wording of KWKG 2023 deviates from that of § 4 (3a) KWKG 2009, a CHP surcharge is still granted under certain conditions for decentrally consumed electricity under the new regulation, so that the two BFH rulings are not only relevant for old cases.

Plant and network operators who have not yet received/issued invoices for supplies and return supplies for decentrally consumed electricity can refer to the BFH ruling vis-à-vis the tax office and thus defend their practice. For entrepreneurs who have so far complied with the application decree, this can be disadvantageous if there is no right to deduct input tax. This is the case, for example, with sewage disposal companies that consume the electricity generated in the area of public service. In this case, the grid operator often accounts for both the fictitious supply received and the fictitious return supply made in a single document: the supply of the plant operator as a credit note and the return supply as the grid operator's own supply. As the supply is an economic activity for which the plant operator is liable for VAT, but the electricity purchased through the return supply is used in the area of public service, the plant operator has no input VAT deduction, and the fiction creates a tax disadvantage and an economic burden for the plant operator. He can rectify this with reference to the BFH case law by objecting to the grid operator's credit note and requesting the grid operator to cancel the invoice for the return supply and to refund the VAT paid, insofar as this is (still) possible under civil law. The affected preliminary VAT returns/annual VAT returns must be corrected accordingly.

It is also to be expected that the BMF will amend the application decree but make a non-objection/transitional provision for old cases.

It remains to be seen how the BMF will react to the obiter dictum on commercial-accounting feed-in. Those affected can already refer to the ruling of the XI Senate in this area.

Operators of photovoltaic systems that were put into operation before 1 April 2012 and for which there is also a fictitious supply and return supply should also check whether the ruling affects their case in terms of VAT.

Dated: 30 August 2023