The wind-swept area of Dobrogea, cornered by the Danube River and the Black Sea, has caught the eye of many strategic investors. They seek long-term profits in a country whose infrastructure is far from being able to support the potential that the region can offer in green energy.
Investors are squeezing into Southeast Romania, erecting windmills at a speed that far outpaces the transport capacity of the existing power grids. And as high hopes and optimism die last in business, they are not planning to stop here.
Studies for nearly 40,000 MW have been conducted and applications for grid connections have been submitted. As a comparison, only 2,600 MW are already operational or expected to be commissioned by the end of 2012.
But even if everything goes as planned and the Romanian government and the regulators put in place enough power grids to transport energy to final consumers, problems still persist.
Indeed, while it is true that land ownership for turbine footprints, legal issues, technological erection platforms or access road to turbines can pose big problems during the investment phase, the financial side can turn out to be crucial at some point.
Building a wind mill requires a great deal of financial effort, starting from the installation and lasting throughout the entire process of the construction, until it finally goes on line.
Investors should not disregard or minimize the fiscal implications in either of the construction phases.
STRUCTURING THE INVESTMENT IN A TAX EFFICIENT MANNER
The decision to invest in one country depends on various parameters. Although not a decisive factor, tax is one of the main aspects to be considered, especially in today’s business climate. Therefore, before making such a decision, the potential investor should be interested in structuring the investment in a manner that would optimize the tax-structure.
There are two main alternatives to invest in a wind power project: acquiring shares in a company or directly acquiring the assets from a company. Each of these options has its advantages and disadvantages, thus it is recommended to perform an analysis for each specific case. Several aspects have to be taken into consideration, such as tax implications at the acquisition moment, during the period when the activity is performed and also when disinvestment occurs.
Generally, there should be no corporate income tax implications for the buyer at the moment when shares or assets are acquired. However compliance obligations could arise under certain conditions. That would imply extra costs and extra time.
Financing and operational phase
Financing is a key aspect for wind power projects which may be performed either by providing a loan or by increasing the share capital of the operational company. Tax implications would differ depending on the type of financing provided.
More specifically, if a loan is granted, one should analyze the tax implications related to the interest paid to the beneficiary: deductibility of interest expenses, withholding tax if the beneficiary is a non-resident. In the case of a contribution to the share capital, the tax implications would be analyzed in connection with the dividends paid to the shareholder. Consequently, the taxable base may be significantly increased by the non-deductibility of interest expenses.
16% withholding tax would be due in Romania if the shares are acquired by a non-resident legal entity for the following types of income: dividends, interest, services rendered in Romania or management and consultancy services. Nevertheless, under certain conditions, the withholding tax rate may be reduced down to nil.
Last but not least, the investors would be interested in the tax implications arising in Romania if they decide to sell the shares in the operational company. Generally, the capital gains tax at 16% is applicable on the profits obtained by a non-resident legal entity upon the sale of shares in a Romanian legal entity.
In all stages mentioned above, transfer pricing implications should be considered if transactions are performed between related parties.
The existing fiscal incentives should not be ignored. Accelerated depreciation is one of them.
RELEASE THE VAT BURDEN
A company buying a windmill may encounter difficulties recovering the incurred VAT. And in practice the reimbursement process in Romania can take as long as months or even more than one year in some cases.
Taken this into consideration, supplying a turn-key project is more advantageous than the acquisition of separate goods and services. The most important point is that the company supplying the turn-key project from another member state does not have to register for VAT purposes in Romania. In this case no actual payment of the VAT will occur for the supplier.
Let’s take the example of a windmill construction and suppose the company that supplies the windmill in Romania is established in another member state. In this respect, it needs equipment and spare parts, which will be transported from other European Union countries.
In the case of turn-key projects, the goods transported from other member states do not lead to the supplier charging VAT, an amount that has to be financed for at least 6-12 months, as mentioned above. But in order to qualify as a turn-key project, the contract between the two parties should clearly mention that the goods are assembled and installed by the supplier or by other taxable person on its account. Also, the supply should be made for the entire project, when finished, and not individualized on pieces of equipment or services.
If these conditions and a few others are not observed, the company supplying the windmill would face VAT registration. This would imply additional costs at the level of the supplier as it will have to finance the VAT and wait for its reimbursement.
Where conditions do not allow it, or if a turn-key project is not seen as optimal, there are other solutions to avoid the VAT burden. Despite administrative jitters, there are optimization opportunities which have turned out successful and have saved investors from having to finance the VAT. Here we can mention just a few: creating a VAT group, import followed by intra-community supply, and assignment of receivables.
IMPORTS / ACQUISITION OF EQUIPMENT
The global supply chain of wind turbines has developed rapidly. In many cases, all components of a windmill are brought from outside the European Union as part of turn-key projects. Crossing the customs border of the European Union will raise several key issues if the importer does not analyze all the implications and opportunities upfront.
One of the things to be considered is the tariff classification of the whole wind power installation in customs. A wind mill consists of a number of components, such as gear box, propeller blades, electric generator, the tower and other castings and forgings. According to custom rules, the windmill itself has its own identification code. But each of the spare parts has different identification codes as well.
For the windmill as a whole, recognized after its identification code, the customs duty stands at 2.7% of the customs value of the installation. On the other hand, customs duty rates for the component parts vary between 0% and 8% of their value. The conclusion is simple: a very careful analysis is needed before making the decision on how to bring the windmill into the country.
The customs value of the wind energy installation, on which customs duties and VAT are charged in customs, is another important aspect to be considered. That is because, on average, the value of a wind installation includes the price of the components, as well as the costs associated with installation, assembly, technical assistance, engineering and design, etc. For example, the costs with the installation and technical assistance taken after the import of the windmill should not be included in the customs value. Therefore, no customs duties or import VAT have to be paid at the moment the equipment is imported.
The amounts paid in customs for customs duties and VAT on the entire value of the project would be significant if precise planning is not undertaken in the preliminary phase of the entire project.
The possibility of optimizing the costs, regardless of their form and value, is out there. It is true that sometimes it can be a struggle fighting the administrative burden, but in the end the effort is worth it.