By Sara Seddon Kilbinger, Senior Reporter, REFIRE
Income that can be generated by renewables to double
The Bundestag has voted to increase the annual limit for tax exemption on revenue generated by Spezial Investmentfonds, in a move designed to increase the production of renewable energy.
Under the terms of the new rule, which forms part of the Annual Tax Act for 2022, the limit has been doubled from 5% to 10% of the total revenue for income coming from the production or supply of electricity linked to the rental and leasing of real estate properties. As a result, property funds will be able to invest in systems such as photovoltaics. The fund industry itself came forward with various initiatives, including more flexible regulations in the draft act. Germany’s upper house, the Bundesrat, has now to approve the law.
However, some fund managers would like to have seen greater flexibility: ‘Policymakers have taken a step forward by raising the de minimis limit,’ said Michael Schneider, managing director at INTREAL. ‘We are ready to acknowledge that. Property funds will have an easier time to invest in photovoltaic system on rooftops, and may do so more liberally. Especially large-scale retail and logistics properties offer plenty of potential in this regard. However, the reform is not a game changer. We would have wished for yet more flexibility. One issue concerns partially or fully vacant properties, for example. In their case, income from rooftop PV plants would violate the limit immediately – and cause drastic economic consequences on the fund and investor levels.’
As INTREAL points out, most property funds so far have qualified as special investment funds under German tax law and are tax transparent as a result, which means that taxes are paid by the investors and not at the fund level. Funds risk losing this tax status as soon as they generate more than 5% - or 10% under the new law - not from letting and leasing but from so-called “active entrepreneurial management.” Producing and selling solar power would fall into the latter category. The consequences of losing its tax status would be dramatic for a fund. Not only would it have to pay trade tax on its earnings, but corporate income tax as well, and it would also be taxed for its hidden reserves, meaning the appreciation of its assets in recent years, without a simultaneous inflow of liquidity.
Qualitas Energy targeting German renewables
Other firms are also renewing German renewables. Last month, Qualitas Energy, a Madrid-based private equity firm specialized in renewable energy investments, reached the first close of its fifth flagship fund with more than €1.1 billion raised, most of which will be invested in Germany.
The vehicle, known as QE V, is broadly the same size as the group’s previous fund, and has a a target size of €1.6 billion. It is clear to see the reason behind Germany’s attraction: earlier this year, the German government announced that it had brought forward its goal of only using renewable power to 2035, attracting investment into a market that has the world’s third-largest capacity of wind and solar power. In addition to Germany, the QE V fund will also invest in its home market, the UK, Italy and Poland.
Government criticized for not going far enough
However, Carina Berberich, head of taxes at INTREAL, chastised the German government for not taking a bolder approach: ‘The body politic is acting erratically,’ she said. ‘On the one hand, it believes that we are at the eleventh hour in terms of climate change, and is making huge efforts to curb carbon emissions. With the Annual Tax Act, it has admittedly taken a step in the right direction, but we feel it could have been a slightly bolder one. A small-scale fiscal policy and political patronage are preventing the swift expansion of renewable energies in this context, and thereby jeopardise the main goals.’
Exceeding the new 10% limit would also have a negative knock-on effect on consumers, according to Berberich: ‘Property funds are not interested in generating tax-free income from solar power,’ she said. ‘They do not mind paying trade tax on any energy they sell on the market. Rather, the issue is the disadvantage created if a fund were to lose its status as a fiscally transparent special investment fund, which would be the case after exceeding the limit. Those affected, by the way, would include the general public. The bulk of the fund assets is held by retirement plans such as superannuation schemes and pension funds.’
