From the point of view of investments in RES, the obvious and necessary issues include securing the title to land, obtaining administrative permits, developing the wind or the photovoltaic farm infrastructure etc. Given the inflation and complexity of tax regulations, this list should now be supplemented with planning and securing the tax aspects of the RES investments.
Before going into details, an important tax context for the hot RES market is that the tax authorities are equally ‘hot’ in investigating whether there are, in their view, undue tax savings in RES investment arrangements. Undoubtedly, entrepreneurs have the right to arrange their business operations in a manner that suits them rather state revenues needs. However, notwithstanding any such favourable legal concepts, the fact that the tax administration will scrutinise the fiscal aspects of such investments must for sure be taken into consideration. And it has a range of legal measures to pursue this purpose, from detailed and narrow regulations, such as ones concerning the non-deductibility of particular categories of expenses, to the general anti-tax avoidance clause, according to which certain operations may be reclassified or even disregarded for tax assessment purposes.
The entire investment must be tax planned in advance in its entirety, each step of the way. This will help minimise problems in the event of a possible tax inspection, including the personal criminal liability of management-board members, and facilitate the process of selling the project in the future by significantly streamlining the buyer’s due diligence process.
Let’s walk through the simplified onshore investment process. Due to this article’s space limitations, I will highlight below the key topics that require special attention.
a. An RES project acquisition requires the following: (i) planning the legal form of the acquiring company (tax transparent or non-transparent) and choosing the country of its registered office and tax residency (ii) deciding on the object of the acquisition: shares in the target special-purpose vehicle (SPV) vs. assets; the choice involves a sufficiently early allocation of projects to the target SPVs and the correct classification of asset transfers in terms of VAT and civil law transactions tax, (iii) a tax due-diligence of the target SPV and managing an investor’s liability for the seller's or the target SPV’s undisclosed tax liabilities as well as negotiating tax-sensitive price clauses, (iv) proper tax planning of development agreements when acquiring projects at their early stages of investment.
b. Financing issues of the project involve: (i) the take over of financing from the seller and its repayment, (ii) injection of equity and the allocation of funds between debt and equity instruments and, in the case of the latter, allocations between share and reserve capital (iii) the negotiation of the external financing terms taking into account possible tax withholding clauses relating to borrower (SPV).
c. The operational phase involves, among others: (i) the proper tax settlement of land lease agreements with the issues of transferring property tax and other public levies to the investor and charging VAT on them, (ii) in case of constructing an RES farm - proper settlement of the investment from the point of view of depreciation for income tax purposes and settlement of property tax, (iii) the allocation of property taxes between lessors and SPVs and making use of the allowable property tax saving opportunities (iv) the sale of energy and settlement of funds from the RES support system perspective.
d. The distribution of funds involves two extremely important and currently hottest tax issues, namely: (i) transfer pricing, i.e. ensuring the intra-group settlements, e.g. those related to the acquisition of services or debt financing, should be at arm’s length, and (ii) the management of issues related to Polish withholding tax on passive income mainly interest and dividends, i.e. securing the right to preferential tax rates for the beneficial owner of the income.
As regards withholding tax, the issue of the beneficial owner of funds received from Poland and its business substance in the country of tax residence, deserves special attention. It is not only a question of formal requirements, such as the appropriate structure of the management board of the company receiving payment, but the actual decision-making process and allocation of competences in the investor’s holding structure. The tax authorities are equipped with a range of legal instruments to verify the ownership structure also in terms of its economic rationality. This even translates into discussions, until recently unthinkable, on whether an investor can set up an SPV at all, where to place it and what importance it should have in its ownership structure. It significantly encroaches on the freedom of economic activity and shaping it in accordance with the owner’ preferences. However, it is absolutely critical to be secure in this respect and to diligently plan the acquisition structure, which is directly related to the issues identified in points a and b above.
On top of the above, one should consider the impact of Brexit on the withholding tax exemption. We are waiting for EU-UK agreement to be reached in this area. The Polish Ministry of Finance seems to claim EU preferences are inapplicable to interest or dividend paid from Poland to the UK. However, I can see quite solid arguments for tax exemptions based on Polish domestic tax regulations alone.
e. Exiting an investment in the future also requires awareness at the investment acquisition stage. The key issue in this respect is to determine whether the sale of the project company would involve taxation in Poland. It is also important from the perspective of possible transfers of project companies, such as an internal reorganisation within the investor's capital group.
How does one manage these issues? All of them should be planned at an early stage and included in a tax acquisition report. Such a report should be supplemented by the tax modelling of investment financing, including requirements concerning the tax deductibility of interest and benchmarking reports establishing the tax safe (i.e. market) level of intra-group fees. On top of that, the other must-have is the tax due diligence analysis regardless of the share or asset deal acquisition and carefully negotiating tax sensitive clauses in the share / asset purchase agreement. An increasingly popular and effective legal tool is also insuring the seller’s warranties and indemnities to safeguard the investor against undisclosed tax liabilities in breach of the seller’s representations. The other type of insurance is a tax specific risk insurance against disclosed tax issues which prolong the negotiations or sometimes even become deal breakers. If feasible from the transaction timing perspective, advance rulings to be requested from the tax administration are on the table as well.
At the end, some more good news on a related topic. Assuming that Poland accepts the EU Reconstruction Fund, we can expect huge financial support for the RES sector. We are waiting with bated breath for detailed rules in applying for subsidies by RES investors. It seems we are in for a very interesting second half of the year.