Business expenses for tax-free photovoltaic systems

According to the new legal regulation in § 3 no. 72 of the German Income Tax Act (EStG), introduced with the Annual Tax Act 2022, income from certain photovoltaic systems is tax-free from the assessment period 2022. However, the tax exemption only applies, on the one hand, insofar as the relevant outputs of the individual photovoltaic systems operated (object-related maximum) comply with the permissible size of 15 or 30 kilowatt peak (kWp) per residential or commercial unit for the respective type of building (the Annual Tax Act 2024 is intended to standardize the permissible size at 30 kWp). On the other hand, the respective taxpayer or partnership must not exceed the 100.00 kWp limit (subject-related exemption limit) for the subsidized photovoltaic systems operated on, at or in buildings.

Provided that the conditions for tax exemption of income from the operation of photovoltaic systems are met, no profit is to be determined for this according to the wording of the law. Furthermore, expenses that are directly economically related to tax-exempt income may not be deducted as business expenses or income-related expenses (§ 3c (1) EStG). In principle, this also applies to the operation of tax-privileged photovoltaic systems. In this regard, the Fiscal Court of Nuremberg, in its judgment of September 19, 2024 (case no. 4 K 1440/23), clarified the question of whether, from the application of the tax-exempt regulation in 2022, business expenses can be taken into account retroactively whose economic cause lies in 2021 or earlier.

In the case in question, the taxpayer operated a single photovoltaic system with an output of 11.7 kWp, which thus fulfilled the conditions for tax exemption in the assessment period 2022. According to the VAT return submitted for 2021, the taxpayer had to make a back tax payment, which he had paid in May 2022. He recorded the VAT paid as a business expense in the profit determination submitted for 2022 and thus claimed a loss from the operation of the photovoltaic system in the same amount in his 2022 income tax return.

The tax office rejected this approach, and in the subsequent proceedings, so also did the Fiscal Court of Nuremberg. Due to the direct economic connection between the VAT payment and the taxable income of the previous year, a deduction cannot be correctly refused under § 3c EStG, because the prevailing opinion is that the economic connection can also exist across years. The tax exemption of the further income is not important here. Nevertheless, the wording of § 3 no. 72 sentence 2 EStG already establishes a binding prohibition on determining the profit from tax-free income in accordance with sentence 1; this is not a mere exemption from the obligation to determine the profit, which the taxpayer can waive if necessary.

Contrary to the taxpayer’s view, this binding regulation also does not violate the objective net principle, according to which business expenses incurred in generating income must in principle be deductible. For example, the taxpayer can now collect any income received in 2022 that still relates to electricity production in 2021 tax-free by applying the inflow principle. If, in the case in question, the taxpayer had submitted a full determination of profits for 2022, including all income and expenses, in accordance with the principle of taxation in instalments, a profit would have been taxable overall. In the view of the fiscal court, an extension of the tax break to include subsequent business expenses is therefore not necessary. This is because the legislature has decided on a clear cut and justified it with the permissible objectives of promoting renewable energies and reducing bureaucratic obstacles.