VAT Rules and Tax Treatment for Solar Power Plant Construction in the EU
If you are a company registered under the Value Added Tax Act (“VAT Act”) and you are about to enter into a contract for the construction of a photovoltaic plant (“PVP”) on the territory of another EU Member State, you should know in advance in which cases you will be able to benefit from the tax credit charged to you by the subcontractors and in which cases you must charge value added tax (“VAT”) and in what amount.
Is the PVP immovable property?
First, in order to properly determine the tax treatment of a PVP construction, the question of whether the particular plant constitutes “immovable property” within the meaning of the VAT Act must be properly answered. And if it is determined to be one, what type of real estate is it – a building or structure.
In this regard, it should be known that the NRA treats PVP differently depending on how the solar panels are installed and where they are installed. According to these criteria, several types are distinguished:
- Panels that are connected to the electrical or heating systems of the building or structure for the purpose of generating electricity or heat, and therefore constitute building/structure infrastructure;
- Panels which are installed on a building or structure without being part of its infrastructure;
- Panels that are mounted/embedded on the roof and serve as a roof;
- Panels that are mounted directly on the ground.
In determining the nature of the PVP, the relevant regulations should be taken into account in each case. This includes, in addition to the VAT Act and Directive 2006/112/EC (“the Directive”), also Implementing Regulation (EU) No 1042/2013 (“Regulation 1042”) and the related objective criteria adopted by the European Commission in the European Commission’s Explanatory Notes of 26.10.2013. 2015 on EU VAT rules for place of supply of services relating to immovable property (the “Explanatory Notes”), the Spatial Development Act (“SDA”), the Energy Act (“EA”), Regulation No. 14/15. 06.2005 on technical rules and regulations for the design, construction and use of facilities and equipment for the generation, transformation, transmission and distribution of electricity (“Regulation No. 14”), Regulation No. 6/24.02.2014 on the connection of producers and customers of electricity to the transmission or distribution grid (“Regulation No. 6”), the case law of the Supreme Administrative Court and the ECJ.
The Explanatory Notes cited above, which are not legally binding but are intended to synchronize the application of the mandatory implementing Regulation 1042 and are shared by the revenue administration in more than one of its opinions, provide the objective criteria for categorizing a PVP as a real estate.
These criteria can be broadly summarised as follows:
- attachment to a specific part of the territory of the Member State;
- means of attachment: whether the means of attachment are easily removable, i.e. without a certain effort and without incurring significant costs;
- whether they can be easily dismantled or moved;
- the need for professional skills to do so;
- the cost of carrying out the dismantling (dismantling/relocation) compared to the cost of the facility itself;
- the time to dismantle the building or structure;
- if the value of the structure would be significantly reduced by dismantling (dismantling/moving).
The treatment of the services supply for construction of a PVP
- The correct categorisation of the PVP as immovable property or not depends on the correct determination of the place of performance of the supply and, consequently, on the tax treatment of the supplies of services for its construction.
The provisions on the place of services provision connected to immovable property in the VAT Act and the Directive are special in relation to the general texts on the determination of the place of execution and therefore they derogate the general ones, i.e. where a supply of a service relates to immovable property, the place of performance is where the property is situated i.e. in the Member State where the PVP is constructed. In general, it matters whether the recipient of the service is a non-taxable person (then the place of performance is where the supplier or his permanent establishment is established) or is a taxable person (then the place of performance is where the recipient or his permanent establishment is established).
The place of supply also determines the applicable legislation with regard to the registration regime, including the formation of a permanent establishment, the obligations of the taxable person, the documentation of supplies.
- The supplies normally carried out in the construction of a PVP can be broadly divided into:
2.1. Supplies made by the company to customers/companies registered for VAT in EU Member States
In this case, provided that the PVP is categorised as immovable property, the services to be supplied by the company to its customers who are registered for VAT in the territory of the other Member State will be treated as services relating to immovable property. If the PVP is not categorised as immovable property, the services will be subject to the general rules for the permanent establishment depending on whether the recipient is a taxable or non-taxable person.
2.2. Supplies carried out by subcontractors of the company. This group also includes the services of hiring out personnel and/or equipment to carry out the works
In this case, the Regulation 1042 provisions must be complied with, since in the most general case it concerns the hiring of equipment for the construction of the PVP and of personnel trained to work with this equipment. For the correct tax treatment of these services, it is again important to consider whether the services relate to immovable property and to take into account the place where the subcontractor is established – whether it is a Bulgarian company or one from another EU Member State, whether it takes responsibility for carrying out the works of construction, installation or assembly of the plant, which, according to the Explanatory Notes, amounts to a construction service, i.e. a service relating to immovable property. If the services relate to immovable property, the company supplying the staff will be subject to VAT registration in the Member State in whose territory the services are to be carried out and, consequently, the documentation will be subject to the regime of that Member State.
Right to deduct tax credit
The right to deduct tax is again subject to the correct classification of the PVP as immovable property or not.
- If the PVP is treated as immovable property and in so far as the place of performance of the services will be in the territory of the Member State where the property is situated, the right to deduct tax credit will be subject to the regime in that Member State if the company using the subcontractor is VAT registered in the territory of that Member State. If it is not registered for VAT in the territory of the Member State in which it is setting up the PVP, the right to deduct tax credit may be exercised in accordance with the legal framework in Directive 2008/9/EC of 12 February 2008 laying down detailed rules for the refund of value added tax provided for in Directive 2006/12/EC to taxable persons not established in the Member State of refund but established in another Member State and Regulation No H-9 of 16 December 2009 on the refund of value added tax to taxable persons not established in the Member State of refund but established in another Member State. For this purpose, a refund claim signed with a qualified electronic signature must be submitted via the WEB-based application created for this purpose on the NRA website.
- If the PVP is not treated as immovable property, the supplies for the rental of personnel and/or equipment will be subject to the general rules for documenting and using the right to deduct tax credit under the VAT Act. If the subcontractor has a permanent establishment in the territory of the Member State concerned, the invoices issued by the subcontractor should bear the VAT number issued by that Member State.