Member Article

After a particularly active consultation round with approx. 140 consultation responses, together with the proposal for the national budget for 2024, the government presented a revised proposal today, 6 October 2023. The criticism from a relatively united renewables industry must be said to have fallen on relatively deaf ears and the proposal is essentially a continuation of the consultation proposal. The government sees it as «Introducing a neutral ground rent tax now will provide the industry with predictable framework conditions and create the right conditions for the development of profitable wind power in the years to come.» There is a lot to be said about the rules, but in this article we will concentrate on giving an overview of the proposal and the most important changes from the proposal in the consultation document.

We emphasize that the proposal is still only a proposal, and the government must now focus on negotiations with SV.

High level

Cash flow tax

• The tax will continue to be designed as a cash flow tax with immediate deductions for investment costs.

Tax rate – 40 percent effective

• The formal rate is set at 44.9 per cent entailing that the effective rate is 35 per cent. A rate of 40 per cent was proposed in the consultation document. At the same time, the rate for aquaculture ended at 25 per cent, and it must be expected that the industry may have problems understanding that the wind power industry, which has historically had low or negative profitability, should be taxed significantly harder than the fish farming industry, given its historically high profitability.

Existing plants are included

• Existing wind power plants are covered by the proposal. The many consultation suggestions that existing facilities should be exempted are dismissed, among other things, with the argument that an exemption for existing facilities could be problematic, as it could involve a breach of the EEA rules on prohibition on state aid.

Carry forward of negative resource rent income with the addition of risk-free interest

• The criticism that the tax value of negative resource rent income must be paid out in order to be neutral is also dismissed. The ministry is still of the view that carrying forward negative basic interest income with risk-free interest in combination with payment of tax value on termination, in present value terms gives the same deduction value as paying out. The criticism that the risk-free interest rate will in practice be far from the company’s actual financing cost is therefore not accepted by the ministry.

Production tax increases, natural resource tax is cut

• The production tax is set at 2.3 øre/kWh and not 2.0 øre/kWh, while the proposal for natural resource tax has been dropped.

Negative resource rent income is paid on termination

• Any negative ground rent income, including costs for removal and return, will be paid upon cessation of operations in the wind power plant.

Deductions

Ongoing operating costs

• Ongoing operating costs that are regularly incurred until the power is fed into the power grid will be deductible. The ministry thus maintains the proposal for a connection criterion for deductible costs in the ground rent tax for onshore wind power that corresponds to the criteria in the ground rent tax for hydropower.

Immediate deduction for investments

• The proposal involves a cash flow tax in the sense that companies are given an immediate deduction for investment costs in the same way as operating costs. Investment costs must be deducted in the year the operating assets are activated.

Deduction for historic investments through ordinary balance depreciation and interest

• For investments completed before 1 January 2024, a deduction is given through ordinary tax balance depreciation of the input value, in addition to compensation for the depreciation occurring over time. The entry value is calculated according to ordinary tax balance depreciation rules for all existing wind power plants, i.e. not based on accelerated depreciation over five years. A corresponding increase is made in the depreciation basis for resource rent-related corporation tax, which is deducted from the ground rent income.The interest is proposed to be calculated on the remaining value at the end of the previous income year. This is multiplied by the risk-free interest rate, adjusted to the interest rate after tax on ordinary income. In the government’s view, this will mean that the present value of the depreciation and interest is equivalent to the value of an immediate deduction for the initial value in 2024. The deduction for interest will only be included in the ground rent income, not in ground rent-related corporation tax.

The government itself describes this as comprehensive transitional arrangements, but it is conceivable that some of those who have invested in existing facilities do not fully agree with this description

Investments in roads, staging areas and other non-depreciable operating assets

• Historical investments in roads, parking lots and other non-depreciable operating assets that have been capitalized but not realized before the income year 2024 are included in the ground rent tax and deducted on realization. This is in contrast to new installations where these can be deducted directly.

Finance costs are not deductible

• Finance costs are still not deductible. Immediate deduction of investments together with carry forward of negative income with addition of risk-free interest is assumed to be sufficient compensation for the rules to become neutral.

Sales and marketing costs not deductible

• The Ministry maintains that sales and marketing shall not be deductible from resource rent income, also for costs related to contracts that are covered by the exemption provisions for income determination based on contract price.

Income calculation

Calculation based on actual production and spot price

• The ministry maintains the proposal that the resource rent income is calculated as the actual production of power in the wind power plant in the relevant hour, multiplied by the spot market price in the area determined by Nord Pool AS and that the income is considered to be earned with regard to the tax when the power is fed into the power grid.

Exceptions with agreed prices

• The ministry maintains the consultation proposal on an exception to the general rule on spot market price for agreements on physical delivery of power at a predetermined price that were entered into before 28 September 2022, and for agreements on financial security of volume sold in the spot market and that were entered into before 28 September 2022.
• According to the consultation proposal, the exception for price hedging through physical or financial agreements shall only apply to agreements between independent parties. However, the ministry proposes to adjust the requirement for independent parties, so that in the case of resale, there will only be a requirement that there must be independent parties somewhere in the sales chain. The price included in the calculation of resource rent income must then be the price at the time of the sale to the independent party. Only the volume that is resold to the independent party is included in the exception
• A temporary exemption is also proposed for standard fixed price agreements (corresponding to the exemption for hydropower) for new projects entered into in the years 2024–2030. The exception involves a transitional arrangement so that income from future long-term (at least three years), physical fixed price agreements between independent parties for projects established during this time period, is calculated according to the agreed price. Projects established in the period 2024–2030 means projects where a long-term fixed price agreement has been entered into, and where an investment decision has been made which means that the owner of the wind power plant comes under the provisions on land rent tax.

High price contribution discontinued from 1. October 2023
The government will phase out the high-price contribution from and including 1 October 2023. It was promised at the time of introduction that the contribution would be phased out by 2024 at the latest.