Following the expansion of the income tax exemption under Section 3 No. 72 EStG, the thresholds for tax-exempt operation of photovoltaic systems have been broadened. For asset-managing partnerships that were previously deemed commercially infected through the operation of photovoltaic systems, this status will now frequently no longer apply. The associated tax consequences must now be addressed.
Infection Theory – Which Entities Are Affected?
Anyone operating a photovoltaic system generally generates income from a commercial business (§ 15 EStG). In addition, a taxpayer may independently generate other types of income, e.g., from letting and leasing (§ 21 EStG). A problem arises when such income is generated not by an individual but by a partnership (e.g., a GbR). If this partnership initially only carries out an asset-managing activity (e.g., income from letting and leasing), it becomes commercially infected upon putting a photovoltaic system into operation (§ 15 Abs. 3 EStG). This means that all income generated by this partnership is attributable to income from a commercial business, and the assets must consequently be capitalized in their entirety as business assets (e.g., including buildings used to generate income from letting and leasing).
Cessation of Commercial Infection – Expanded Tax Exemption for PV Systems
The 2022 Annual Tax Act expanded the income tax exemption thresholds for photovoltaic systems under § 3 Nr. 72 EStG. As a result, photovoltaic systems that were previously subject to income tax may now be exempt. If the income from the photovoltaic system is tax-exempt, an asset-managing partnership will, from 2022 onward, also no longer generate income from a commercial business. The previous commercial infection of income and the entanglement of assets with business assets thus cease to apply. Consequently, the affected assets are withdrawn from business assets. However, in this withdrawal process, substantial hidden reserves may be uncovered, which must then be taxed (e.g., buildings used to generate income from letting and leasing).
Extension of Deadline to 31 December 2023
In the BMF letter dated 17 July 2023, however, the tax authorities have granted a deadline extension beyond the entry into force of the tax exemption. For reasons of legitimate expectations, a withdrawal is not assumed if the entanglement of the hidden reserves is restored by 31 December 2023 on other grounds (BMF dated 17 July 2023, DStR 2023, 1659, para. 23).
Review of Commercial Infection
For commercial infection of further income to occur, the de minimis thresholds must be exceeded. For this reason, it must first be reviewed whether such a commercial infection existed in the past. The de minimis thresholds are as follows:
For a commercial infection to occur, the commercial turnover must exceed 3% of the partnership's total net turnover and exceed EUR 24,500 per calendar year.
The aforementioned de minimis threshold was rarely exceeded by smaller photovoltaic systems in the past.
Possible Solutions – Continued Entanglement of Hidden Reserves
If a commercial infection and consequently an entanglement of assets within business assets existed, the following options may be pursued to avoid withdrawal taxation:
- Conversion of the legal form into a commercially characterized partnership (e.g., GmbH & Co. KG).
- Expansion of the photovoltaic system beyond the current income tax exemption thresholds under § 3 Nr. 72. Alternatively, the residential or commercial units in a business building may be reduced, as these are decisive for the scope of the tax exemption.
- The co-entrepreneurship takes up another commercial activity.
- The co-entrepreneurship is contributed into a commercially active co-entrepreneurship or a corporation.
Note: Is Continued Entanglement Advisable?
Finally, the co-entrepreneurship must of course also consider whether continued entanglement appears advisable or whether the withdrawal gains should be taxed.
This is particularly worth considering if the commercial infection only covered a few years, as in such cases substantial hidden reserves are typically unlikely to have accumulated in the assets. The resulting tax burden would accordingly not be particularly high.
With continued entanglement of the hidden reserves, not only is the point in time of withdrawal taxation deferred, but the taxable event itself may well increase further. Furthermore, continued commercial infection of the income would eliminate certain tax reliefs (e.g., the trade tax reduction for asset-managing entities, the 10-year speculation period).
Frequently asked questions
Frequently asked questions
When does a photovoltaic system trigger commercial infection of an asset-managing partnership?
If an asset-managing partnership (e.g. GbR) operates a photovoltaic system alongside its primary activity, it generates commercial income under § 15 EStG. Pursuant to § 15 Abs. 3 EStG, this reclassifies all of the partnership's income as commercial income, and all assets must be capitalized as business assets. However, this only applies if the de minimis threshold is exceeded.
What is the de minimis threshold for the commercial infection of a partnership?
Commercial infection only occurs if the commercial turnover exceeds 3% of the partnership's total net turnover and at the same time exceeds EUR 24,500 per calendar year. For smaller photovoltaic systems, this threshold was rarely exceeded in practice.
What are the tax consequences of the elimination of commercial taint under Section 3 No. 72 EStG?
Due to the tax exemption under Section 3 No. 72 EStG, expanded by the 2022 Annual Tax Act, the partnership no longer generates commercial income from the photovoltaic system. Assets previously affected by commercial taint (e.g., rented buildings) are removed from business assets, requiring the disclosure and taxation of hidden reserves.
What deadline extension does the BMF grant to avoid withdrawal taxation?
Under the BMF circular of 17 July 2023, withdrawal taxation is waived on grounds of legitimate expectations if the taxation link to the hidden reserves is restored on other grounds by 31 December 2023. This leaves time to implement a suitable structuring solution.
Which structuring options avoid withdrawal taxation when commercial infection ceases?
Options include converting into a commercially characterised partnership (e.g. GmbH & Co. KG), expanding the PV system beyond the limits of § 3 Nr. 72 EStG, taking up another commercial activity, or contributing the assets into a commercially active co-entrepreneurship or corporation. Before deciding, it should be examined whether continued tax entanglement is economically sensible.
When can taxing the withdrawal gains be more advantageous than continuing the tax entanglement?
Immediate taxation can be beneficial if the commercial infection (gewerbliche Infizierung) lasted only a few years, so that hidden reserves have barely accumulated. With continued entanglement, the future tax burden tends to increase, and tax advantages such as the extended trade tax deduction or the 10-year speculation period remain unavailable.