The Distance Act and unlawful state aid – what next?

In recent days, in connection with the publication of the Act on investments in wind power plants, i.e. the so-called Distance Act, a lively discussion has started concerning the regulations proposed in this act. It is no secret that the act, whose introduction was motivated primarily by safety concerns, strongly interferes with the wind energy sector, significantly reducing the profitability of this type of investment. Industry representatives even indicate that the introduction of the act may lead to the collapse of a significant number of such investments – and, as expert analyses show, these fears seem fully justified.

The law is not extensive and contains only 18 articles. After long discussions, the legislator finally retained two solutions which, in my opinion, raise serious legal doubts.
Firstly, in Article 4 it indicates the minimum distance at which wind turbines may be located in relation to residential buildings, setting this distance at ten times the height of the turbine measured from ground level to the highest point of the structure, including technical elements, including the rotor with blades.

Secondly, it defined the wind power plant itself (Article 2), with the definition indicating that the entire power plant is a structure (including its technical elements). At the same time, the Act contains several other provisions (among others, the provisions amending the Construction Law – Article 9(1) and (3), as well as the intertemporal provision of Article 17), from which it follows that, in connection with the inclusion of the technical elements of the power plant in the definition of a structure as well, the intention of the legislator was that the property tax should be paid on the entire investment and not, as was the case so far, only on its construction part. The latter issue is currently the subject of numerous statements by lawyers and tax advisors, with some of them pointing out that the inclusion of the technical part of wind power plants in the property tax is not so obvious and may be subject to different individual interpretations by tax authorities. Without prejudging this issue in this blog post – although, in my opinion, the probability of obtaining favourable interpretations – in view of the unambiguous provisions of the distance act – is not high, I would like to discuss the above issue assuming that the property tax will be calculated on the entire wind power plant.
As it happens, I had the pleasure of co-authoring a legal opinion on the compliance of the distance act with the European law, commissioned by the Polish Wind Energy Association. In the opinion, together with Dr Szymon Syp, we emphasised that there are serious doubts as to the compliance of the proposed regulations with a number of EU norms, including the provisions of the Treaty, the Charter of Fundamental Rights or the RES Directive. We also analysed the indicated regulation from the point of view of its compliance with state aid regulations. I would like to return to this topic in this blog post.

Taxes and state aid – or in other words, not exactly a free-for-all in one’s own house
To begin with, it should be noted that the European Commission has been particularly sensitive in recent years to the issue of state aid granted under the guise of non-discriminatory tax measures. This is exemplified by proceedings involving both entire tax systems adopted by Member States (e.g. the decision on the tax on inspections introduced in Hungary) and individual acts (e.g. high-profile cases of tax interpretations on transfer pricing issued e.g. by the tax authorities in Luxembourg, as a result of which group companies paid lower taxes than entities in a similar situation – cf. the already closed Fiat or Starbucks cases, as well as open proceedings in many other cases).
In this situation, any changes in the tax system should be made by the Polish legislator with particular caution. In my opinion, such caution and, above all, consistency, was lacking in the case of the second solution introduced by the distance law and leading to an increase in the tax burden on investments in wind power plants.
Without going into details (I will not discuss all the prerequisites of state aid here – in this respect I refer to the opinion), the problem in the case of the tax obligation extended by the act boils down to the fact that the proposed solution (assuming that it would be compliant with other EU regulations, e.g. the RES directive) has a selective character. The problem with the proposed solution (assuming that it would be compliant with other EU regulations, e.g. the RES directive) comes down to the fact that it is a selective advantage, i.e. it favours, in an unjustified manner, other categories of investments in renewable and, more broadly, conventional energy, in relation to wind power plants, in the case of which only the construction parts and not the technical parts of the installation will be subject to taxation. Assuming, therefore, that the introduced solution is justified and expedient, property tax should also be payable on the technical parts also in the case of other renewable energy generation installations, and it would be reasonable to ask whether such taxation should not also apply to the technical parts of conventional energy installations.

The consequence of assuming that the introduced provisions result in a selective advantage for entrepreneurs implementing energy investments of a different type than in wind power plants would be that other entrepreneurs thus obtain state aid (by paying less tax than their competitors in the wind power industry). Such selective treatment of different entities does not in itself prejudge the prohibited state aid nature of a measure. Differences in the treatment of different entities may be justified by the characteristics of the relevant reference system. However, the introduction of such differential tax treatment of different renewable energy installations has not been justified by the legislator in any way.

Cui bono?
In theory, it can be argued that it is not in anyone’s interest to initiate proceedings on the compatibility of the proposed regulations with state aid rules. It can be assumed that such proceedings will not be initiated by the state itself, nor will other investors in the renewable energy industry. Seemingly, this type of solution is also not in the interest of the wind energy industry, as the only thing investors could achieve in this way is to extend the taxation for the technical part of the installation also to other renewable energy installations.

The truth is, however, that this type of measure can effectively influence the legislator and even lead to the restoration of the previous legal status quo as far as the taxation of wind power investments is concerned. Moreover, the Commission itself also has instruments to suspend the application of a given measure constituting alleged state aid. This is perfectly demonstrated by the EC’s recent decision in the Hungarian case, concerning the procedure for the introduction of a progressive rate of inspection fees. The proceedings ended with a negative decision by the Commission, i.e. finding unlawful state aid. What is important, however, is that in this proceeding the actual recovery of the aid did not take place (so far) due to the fact that the Commission first issued a decision ordering the suspension of granting of aid by the Member State, whereby the suspension meant in practice the non-application of the introduced regulation. It is also important for those considering such measures that the Commission’s interim decision was taken quite quickly, as in practice it took approximately four months from the filing of the complaint by the interested party (March 2015) to the issuance of the interim decision (July 2015). In contrast, the final decision in the case declaring the introduced tax to be unauthorised state aid was taken one year after the opening of the procedure.

Proceedings on the compliance of the introduced regulations with the state aid rules may therefore be one of the means to effectively challenge the solutions adopted in the distance law. It is worth noting here that the issue of potential non-compliance of the introduced tax system with the state aid rules may arise not only in the case of the Distance Act, but also in the case of the Retail Sales Tax Act. Interestingly, in the latter case, the body responsible for public aid in Poland – the Office of Competition and Consumer Protection – has also expressed criticism of the proposed regulation….