Legal Alert – Tax Administration Publishes Guidance on Taxation of Wind Power Plants
The Finnish tax authorities have published an updated guidance on the taxation of wind power plants and their construction sites. The guidance confirms the established and existing tax practices applied in the taxation of wind power plants.
Real estate taxation
According to the Real Estate Tax Act (654/1992), real estate is defined as a property site, estate or another independent unit of land ownership which is or could be recorded to the real estate registry under the Real Estate Register Act (392/1985). Some types of real estates and buildings are nevertheless excluded from the scope of said Act, e.g. windmills which meet certain criteria concerning for example their size and power output. The real estate tax covers all types of buildings and constructions, e.g. also buildings or constructions still under construction.
The Real Estate Tax Act does not contain any further definition of a building or real estate; taxation practice however dictates that a building is a fixed or permanent building, construction or facility. The said definition generally also meets the definition of a real estate under the Land Use and Construction Act (132/1999).
According to a decision of the Supreme Administrative Court (KHO 11.11.2004 t 2887), when calculating the depreciation of the acquisition cost of the windmill, the windmill mast with its engine room was to be regarded as a building. The rotor with its blades, the gear box and the generator were to be considered as a machine, equipment or similar movable property. According to the new guidance, the same definition deriving from the decision of the Supreme Administrative Court may also be used when interpreting which part of the windmill is considered as a building and which part of the windmill is considered as movable property in real estate taxation. Therefore, the mast and the foundation of a windmill are treated as a building under the real estate taxation, while the rotor, gear box and generator and other machinery are considered by their nature as movable property and as such, fall out of the scope of real estate taxation.
Compensation and other remuneration for construction sites
The guidance also covers the tax authorities approach to the tax treatment of land lease and other compensations associated with the construction site of a wind power plant. In addition to the rent of land, the owner of the land may be paid compensations for the use of land and other contractual payments related to the activity performed. According to the guidance, compensations are taxed in accordance with their true nature e.g. as rental income or as compensation for damages.
If for example a share of the electricity production of the wind power plant located on the real estate is paid to the land owner based on the right to use the real estate for the wind park, the said income is treated as rental income comparable to land lease. Also, if the damages caused to the property cannot be specified or quantified, the said payments are usually treated as rental income. Compensation for damages can be considered as tax-exempt only if the compensation is paid for material damages. In such case, the compensation has to be included in the sales price of the land if the property is sold within five years, unless the compensation has been used to repair or to restore the damaged property.