BFH Ruling on Earlier Investment Deduction for Start Up Photovolatic Power Plant

In a ruling of 20 June 2012 concerning the installation of a photovoltaic power plant, the Federal Fiscal Court (BFH) has eased the obligations to provide proof for business founders who want to claim a tax deduction for investments.

Small and middle-sized companies can claim investment deductions and special depreciations pursuant to Section 7g Income Tax Act (EStG), even before making the actual investment. The tax relief at an early stage of decision on the business and the investments related thereto shall help business founders to finance their business.

According to Section 7g para. 1 sent. 2 no. 2 a EStG, the taxpayer has to plan to make the investment in the three fiscal years following the year for which the tax deduction is claimed. For a business for which the founding process has not been completed, this is difficult to verify, BFH points out. Concerning a former version of Section 7g EStG BFH had therefore consistently ruled that the tax deduction could only be claimed when a binding order for the asset had been made. The fiscal authority wanted to apply these rulings on the case at hand and deny the tax deduction as the photovoltaic power plant had not been ordered in the year for which the tax deduction was claimed.

BFH, however, held otherwise. Although a strict verification of the intention to make an investment was needed for businesses in the process of foundation, the taxpayer could prove his intention by other means than a binding order under the new version of Section 7g EStG, the court held.

The ruling was of special importance for the operators of photovoltaic power plants, the court pointed out. They can claim the investment deduction, even if they have not ordered a plant until 31 December of a given year, but can prove that the investment was foreseeable.

Source: BFH, ruling of 20 June 2012 ( X R 42/11)

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