Financing in RES projects – tax aspects of selected forms of financing
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Investing in the renewable energy sector requires careful evaluation of the financing options available. A critical element of this process is assessing the tax implications of each potential financing method. Let’s explore the tax implications associated with the most common methods of financing of renewable energy projects.
Intra-group financing through loans
Capital groups often use intercompany loans as a financing tool, offering flexibility in terms and conditions.
Corporate income tax (CIT) and intercompany loans
From a CIT perspective, the financing provided in the form of loans and their repayment are tax neutral. However, tax obligations arise on the payment of interest. While interest may constitute tax deductible costs for the borrower, restrictions such as thin capitalisation limitation must be taken into account. These rules limit the deductibility of debt financing costs to thevalue of PLN 3 million or 30% of taxable EBITDA (whichever is greater). Important : renewable energy projects may be excluded from these restrictions as long-term public infrastructure projects.
Recent standpoint of the Director of the National Revenue Information (KIS) and the Supreme Administrative Court (NSA) confirms the applicability of such exclusions, although standpoints which are negative for taxpayers still occur.
This method of financing also requires compliance with transfer pricing rules,rules on hybrid mismatches, the shifted income tax and the “domestic” minimum corporate income tax (effective from 2024).
Withholding tax (WHT)
With respect to loans from foreign lenders, withholding tax is an important consideration. The application of exemptions or preferential rates still raises many doubts. Planned tax explanatory notes from the Ministry of Finance may influence the practice in this area.
Civil law transactions tax (PCC) and VAT
Loans from direct shareholders to companies are exempt from PCC. In other cases, an analysis of the VAT implications is required, as financial services such as loans are generally VAT exempt and therefore excluded from the PCC. However, granting of one-off loans may give rise to reclassification risks.
Additional payments (in Polish: dopłaty)as a financing tool
Additional payments combine the features of equity and debt financing and offer flexibility. It is possible to modify matters arising from the Commercial Companies Code through contractual provisions.
CIT, PCC, and VAT implications for capital contributions
Additional payments are tax neutral from CIT perspective, both when made and when they are reimbursed. In addition, the CIT regulations allow to include in tax deductible costs so-called hypothetical interest costs up to PLN 750,000 over three years. This is intended to somewhat equalise the situation with entities using debt financing that generates interest.
Additional payments do not trigger VAT obligations.
The only tax burden is the PCC, which is levied at a rate of 0.5% on the value of the additional payments made.
Cash contributions to share capital
Cash contributions intended increase share capital are subject to a 0.5% PCC. However, any excess over the nominal value of shares (share premium/agio) is not taxed. .
No CIT or VAT consequences
There are no CIT or VAT liabilities associated with such operations. The absence of an interest component eliminates the need to apply thin capitalisation rules, the ‘domestic’ minimum corporate tax or the hybrid mismatches, and shifted income tax rules.
How can we help?
We provide comprehensive support in selecting the most advantageous financing structure for renewable energy projects. Our team analyses business structures and helps to tailor financing models to the specific characteristics of your investment and business strategy.
Conclusion
The choice of financing method for renewable energy projects depends on the specific nature of the investment and its business structure. A detailed tax analysis of each option is essential to minimise tax risks.
Contact us for tailored assistance in this area.
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