Tax aspects of renewable energy investments in Poland

The Polish renewable energy market, particularly wind and solar power, has recently enjoyed a boom. This is the result of global trends, EU regulatory requirements, and the government’s decision to support green energy.

From the perspective of investments in renewable energy sources (RES), key considerations include securing land title, obtaining administrative permits, and developing the necessary infrastructure for wind or photovoltaic farms. Additionally, due to the inflation and complexity of tax regulations and their continual changes, it is important to plan and secure the tax aspects associated with RES investments.

Before delving into specifics, it is important to understand that firms are entitled to structure their business operations in a way that best suits their objectives rather than the interests of state revenue. On the other hand, the tax administration possesses various legal mechanisms to examine the fiscal aspects of investments. These range from detailed regulations, such as those concerning the non-deductibility of certain expense categories, to broader measures like the general anti-tax avoidance clause, which allows for the reclassification or disregard of transactions for tax assessment purposes.

The entire investment should be tax-planned in advance, taking into account tax considerations at each stage. This approach can help reduce problems in the event of a tax audit, including personal criminal liability for board members, and streamline the process of selling the project by making the buyer’s due diligence process more efficient.

Let’s go through the simplified investment process, highlighting issues that require special attention.

• A RES project acquisition involves several steps:
  • Planning the legal form of the acquiring company (tax transparent or non-transparent) and selecting the country of its registered office and tax residency; the Polish holding regime that allows for capital gains and dividend tax exemption should also be considered
  • Deciding on the object of the acquisition: shares in the target SPV, assets or going concern; this choice requires proper classification of asset transfers in terms of VAT and civil law transactions tax
  • Conducting 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
  • Negotiating tax-sensitive price clauses, particularly any price deferrals such as earn-outs, and planning the development services settlements
  • Ensuring proper tax planning of development agreements when acquiring projects at their early stages of investment
  • Arranging tax-safe transfers of the project rights or SPVs within the investor’s
• The financing aspects of the project:
  
  
  • Transfer of financing from the seller and its repayment, such as subrogation, which serves as a legal tool for changing lenders
  • 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
  • Negotiation of external financing terms while considering possible tax withholding clauses related to the borrower

• The operational phase:
  • Appropriately settling taxes for land lease agreements, including the transfer of property tax and other public levies to the investor and charging VAT on them
  • Segregating investment costs for depreciation and income tax purposes and settling property tax
  • Analysing the recently amended property tax regulations to identify potential tax savings
  • Selling energy and accounting for the RES support system.
• The distribution of funds involves two critical tax considerations:
  • Transfer pricing, which requires that intra-group transactions, such as those related to the acquisition of services or debt financing and associated collaterals, are conducted at arm’s length
  • The management of issues related to Polish withholding tax (WHT) on passive income, predominantly interest and dividends, to secure preferential tax rates for the beneficial owner of the income.

Regarding WHT, the issue of the beneficial owner of funds paid out from Poland and its business substance in the country of tax residence warrants significant attention. It encompasses the formal requirements – the appropriate composition of the management board of the company receiving payment, as well as the actual decision-making process and allocation of competencies within the investor’s holding structure. Tax authorities are equipped with various legal instruments to verify the ownership structure, including its economic rationality. This extends to discussions on whether an investor can establish a special purpose vehicle (SPV) or holding company, where it should be located, and the importance it holds within the ownership structure. Such scrutiny significantly impacts the freedom of economic activity and its structuring according to the owner’s preferences. Nevertheless, it is imperative to ensure security in this respect, and to meticulously plan the acquisition and financing model.

The Ministry of Finance is currently working on liberalising the existing pro-fiscal WHT practice and accepting practical concepts such as the look-through approach or consolidated substance. These changes could potentially allow for WHT preferences by considering the broader context of the investor’s group and its aggregated human and technical capabilities.

In addition, it is important to consider the impact of Brexit on the WHT exemptions. The Polish Ministry of Finance states that EU preferences do not apply to interest or dividends paid from Poland to the UK. However, there are arguments for tax exemptions based solely on Polish domestic tax regulations.

• Exiting an investment in the future also requires attention at the investment acquisition stage. It is important to determine whether the sale of the Polish project company and the change of a lender would result in taxation in Poland. This applies to foreign sellers and lenders as well, and is significant from the perspective of potential transfers of project companies, such as those due to internal reorganisation within the investor’s capital group.

How should these issues be managed?
They must be planned at an early stage and included in a tax acquisition report. This report should be supported by tax modelling of investment financing, including requirements concerning the tax deductibility of interest and benchmarking reports establishing the market level of intra-group fees.

Additionally, it is essential to conduct a thorough tax due-diligence analysis, regardless of whether it is a share or asset deal acquisition. It is also important to carefully negotiate tax-sensitive clauses in the share or asset purchase agreement.

An increasingly popular and effective tax management tool is insurance against disclosed tax issues. These issues may prolong negotiations or even become deal breakers. Tax insurance assists in overcoming these difficulties by safeguarding the tax position in the event of future challenges from the tax administration.

If feasible within the transaction or operational timeline, advance tax rulings requested from the tax administration can provide additional security. Otherwise, and/or if investors’ money likes silence more, the tax insurance may again be more preferrable option.