Ireland Taxes and incentives for renewable energy KPMG Global Energy & Natural Resources.
Corporate tax relief
Irish tax law provides tax relief for corporate equity investments in certain renewable energy projects. Commonly known as Section 486B relief, the law allows a deduction from a company’s profits for its direct investment in new ordinary shares in a qualifying renewable energy project. There are a number of conditions that must be satisfied for the investment to qualify for the relief, and the relief is capped at certain levels. Examples of renewable energy projects that would qualify for the relief include those in the solar, wind, hydro and biomass categories.
This relief expired on 31 December 2014 and investments made after this date will not qualify for the relief.
In 2011, the Irish government introduced the Employment and Investment Incentive (EII) scheme, designed to promote the creation of jobs and encouraging R&D activities.
The EII scheme provides tax relief for eligible individuals who invest in certain qualifying small and medium sized trading companies. The relief takes the form of a deduction from an individual’s taxable income in the year of investment and a further deduction after a three-year investment term has passed (subject to certain conditions being met). A number of conditions must be satisfied for an investment to qualify under the scheme. However, the legislation includes some helpful provisions designed to ensure that renewable energy projects meet the qualifying criteria.
R&D tax credit
A company can claim an additional tax credit of 25 percent on qualifying expenditure incurred on R&D activities. For accounting periods prior to 1 January 2015, a credit can be claimed on incremental qualifying expenditure over the amount spent on R&D activities in the base year (that is, an accounting period ending in 2003). Companies can use a volume-based regime (a 25 percent credit for every EUR incurred) on the first EUR200,000 of qualifying expenditure for periods commencing between 1 January 2013 and 31 December 2013 and the first EUR300,000 for periods commencing between 1 January 2014 and 31 December 2014. For accounting periods beginning on or after 1 January 2015, the requirement to subcontract the base year (2003) R&D expenditure has been removed and all qualifying R&D expenditure will be eligible for the 25 percent tax credit.
Qualifying expenditure includes expenses such as salaries, overhead, materials consumed, etc. [A tax deduction is also available against the company’s profits which are taxable at 12.5 percent. This can result in a 37.5 percent net subsidy for a trading entity (12.5 percent corporation tax deduction and a 25 percent R&D tax credit)]. The tax credit can be used in the first instance to shelter a group’s current year corporation tax liability. It can also be carried back for offset against the company’s corporation tax liability in the preceding period, or carried forward to reduce future corporation tax liabilities. Instead of carrying the credit forward, a company may elect (subject to certain conditions) to have any remaining excess credit paid as a cash refund by Revenue over 3 years.
Accelerated capital allowances
Companies are entitled to claim accelerated capital allowances (tax depreciation) of 100 percent for capital expenditures incurred on the purchase of certain energy-efficient equipment or vehicles. This scheme has been extended for 3 years, to the end of 2017.
Under an EU Directive, the Irish government has an obligation to ensure that, by 2020, 16 percent of all energy consumed in Ireland across the electricity, heat and transport sectors is from renewable sources. The Irish government has planned that the 16 percent overall target will be achieved by 40 percent of electricity consumed being from renewable sources, 12 percent of consumption in the heat sector being from renewable sources, and 10 percent of consumption in the transport sector being from renewable sources.
Ireland currently has two Renewable Energy Feed in Tariff (REFIT) schemes open for applications. The REFIT 2 scheme applies to onshore wind, small hydro and landfill gas. The REFIT 3 scheme applies to biomass technologies. The schemes operate by guaranteeing a minimum floor price for supplies of energy generated from renewable sources. The 2015 reference prices for the REFIT 2 and REFIT 3 schemes are as follows:
|Onshore wind (above 5 MW)||EUR69.72/MWh|
|Onshore wind(equal to or less than 5 MW)||EUR72.167/MWh|
|Hydro (equal to or less than 5 MW)||EUR88.068/MWh|
|Biomass Landfill Gas||EUR85.622/MWh|
|AD CHP (units less than or equal to 500 kW)||EUR157.613/MWh|
|AD CHP (units greater than 500 kW)||EUR136.598/MWh|
|AD (non CHP) (units less than or equal to 500 kW)||EUR115.583/MWh|
|AD (non CHP) (units of greater than 500 kW)||EUR105.076/MWh|
|Biomass CHP (units less than or equal to 1500 kW)||EUR147.106/MWh|
|Biomass CHP (units of greater than 1500 kW)||EUR126.091/MWh|
|Biomass combustion (non CHP)||
EUR99.822/MWh for using energy crops
EUR89.314/MWh for all other biomass
The energy supplier is also entitled to a balancing payment for every kWh purchased from the generator. The balancing payment under REFIT 2 and REFIT 3 is fixed at EUR9.90/MWh. The full EUR9.90/MWh is payable to the supplier where the market payment is equal to or less than the reference price. If the market price exceeds the reference price but is less than the combination of the reference price plus balancing payment, the balancing payment shall be EUR9.90 less the amount by which the market payment exceeds the reference price. However, where the market payment is equal to or greater than the combination of the reference price plus balancing payment, no balancing payment is payable.
In addition to the above, the Irish government has committed to a 20 percent national energy savings target by 2020 which represents a reduction of approximately EUR2.4 billion in energy spend across all sectors. To support this target, the government has set itself the target of achieving a 33 percent reduction in energy use in the public sector. As a result of these energy reduction measures, substantial investments in renewable energy projects/funds are being actively encouraged, resulting in real investment opportunities in Ireland.
Global investment is booming in green and clean-tech industries that produce renewable energy, increase energy efficiency or provide sustainability solutions. Major investors include pension funds, life funds, large corporations and high net worth individuals. These investors are attracted to a variety of fund structures to diversify the risk between different green investments and different geographies.
With almost 25 years expertise and experience, Ireland has one of the most sophisticated investment management industries globally. This includes expertise in fund servicing, administration and asset management. Fund promoters are attracted to Ireland due to its open, transparent and well regulated investment environment, its strong emphasis on investor protection, its efficient tax structure (with a 12.5 percent corporate tax rate) and its dynamic, innovative business culture.
In addition to Ireland’s credentials as a leading investment funds location, the case for Ireland as a global center for green asset management is even more compelling. For many years a large number of Irish companies have successfully developed renewable and sustainable projects and related technologies on a global scale. As a result, Ireland has been able to create an unparalleled talent pool with the requisite expertise to support green investments. The combination of these two factors sets Ireland apart.
A number of green investment funds have established operations in Ireland and all indications would suggest that the scale of this activity will increase considerably in the short to medium term. A public private partnership body known as the Green IFSC (GIFSC) has been established to promote Ireland as a center of excellence for green asset management.