Government Draft JStG (Annual Tax Act ) 2022: Zero VATrate on solar modules for photovoltaic systems

On 14 September 2022, Germany’s Federal Government submitted a draft Annual Tax Act (JStG 2022), which contains a significant addition to the speaker's draft law dated 28 July 2022: a zero VAT rate will be applied to solar modules for photovoltaic systems starting
1 January 2023.

The EU had already paved the way for more VAT-related climate protection measures when it amended the VAT Directive by adjusting the VAT rates (you can read our web article on this here). The list of goods and services that can be taxed at a reduced rate was extended, for example, to include heating systems that meet certain environmental requirements, and bicycles were also given favourable treatment as they are an environmentally friendly form of mobility.  As a first step, the federal government is now taking advantage of the new leeway with regard to solar modules for photovoltaic systems, for which a VAT rate of zero will now apply as per § 12 (3) of the draft German VAT Code (UStG-E). This applies to the supply of goods to operators of photovoltaic systems, intra-Community acquisition, import, and also the installation of such modules.  The zero VAT rate also applies to the components necessary to operate a photovoltaic system and to the storage devices used to store the electricity generated by solar modules.

One requirement is that the photovoltaic system is installed on or near private flats, flats, and public and other buildings used for activities serving the common good. The distinction made between the terms “private flats” and “flats” is somewhat confusing, but perhaps the distinction is made to ensure that commercially rented flats are also included. It is the responsibility of the module suppliers to check that these requirements are met. To facilitate this, the requirements are considered met if the photovoltaic system’s installed gross capacity does not exceed or will not exceed 30 kW (peak) according to the Core Energy Market Data Register (MaStR).

This new regulation aims to reduce the bureaucratic effort for those operating such photovoltaic systems.  By feeding the electricity they generate into the public grid, these (often private) operators become VAT-taxable persons. Based on their low turnover, however, they could generally follow the special regulations applicable to small businesses defined in § 19 of the German VAT Code (UStG). However, doing so prevented them from claiming an input VAT deduction from their purchase of the system, so they often waived their right to use special regulations for small businesses. The new regulation aims to remedy this situation. If there is no VAT charged on the purchase (and therefore none to deduct), there is nothing to prevent them from taking advantage of the special regulations applicable to small businesses.

A new addition to the German VAT Code is the term "zero VAT rate". In legal terms, this is actually a VAT exemption with an input VAT deduction - which is also how the VAT Act system has been structured until now. In principle, there is no right to an input VAT deduction for VAT-exempt transactions.  However, an input VAT deduction is possible in certain cases.  For example, intra-Community supplies of goods are exempt from VAT, but the denial of an input VAT deduction does not apply here. The new regulation here, for the first time, applies a technique commonly used in some EU Member States:  The transactions involving solar modules are not tax-exempt, but subject to a VAT rate of zero. This means that the denial of an input VAT deduction is eliminated from the outset. It is unclear what prompted the federal government to deviate from the common legal technique.

Entrepreneurs in the field of photovoltaics face challenges if the requirements for presuming that the system’s gross output does not exceed 30 kW have not been met. This does not automatically deny a zero VAT rate, but it must then be checked whether the photovoltaic system is installed on or in the vicinity of private flats, flats, or public and other buildings used for activities serving the common good.  The wording "on or near private flats and flats" is nebulous and does not address the question of whether business models other than those involving the sale of solar modules to non-taxable persons are also included.  There can be a situation where the photovoltaic system is installed on or near a (private) flat, but the system is operated by a VAT-taxable person. Since the bureaucracy problem is less relevant for VAT-taxable persons than for private individuals, the question arises as to whether there is even a need for the zero VAT rate here. However, the wording of the planned new regulation does not deny a zero VAT rate to such arrangements. Furthermore, in the case of complex business models, it may not always be possible to establish beyond doubt who is actually operating the photovoltaic system. 

In any case, atypical arrangements must be carefully examined with regard to VAT law - if the legislature does not clarify the wording beforehand. If VAT is wrongly charged, the system’s operator may be denied the input VAT deduction.