Taxation of Income from Solar Panels

The electricity sector is responsible for about 70% of greenhouse gas emissions. Recently, awareness of the tremendous damage to the ecological system caused by electricity production has increased. This awareness has led to the creation of solutions to reduce environmental damage, among them the shift to renewable energy. In this article, we will explain the taxation of income from solar panels; specifically, the taxation of solar electricity by the electric company and the taxation of renewable energy in general.

The increase in environmental awareness has led to more and more privately owned areas in Israel being used for solar energy production. The renewable energy sector is another economic channel gaining momentum, similar to the real estate and securities markets, and is considered (even by banks) a profitable and secure investment.

Solar energy is not a modern invention; in fact, it was pioneered in the 1950s by Dr. Zvi Tabor, an Israeli physicist born in England. Then Prime Minister David Ben-Gurion approached him, and Dr. Zvi Tabor agreed to his request and immigrated to Israel. Dr. Zvi Tabor donated his invention to the state out of Zionist ideology, and the patent was registered in the name of the State of Israel. Even today, about 70 years later, Dr. Tabor”s invention remains a leading solution in the renewable energy sector.

Regulation of solar energy production

Discussions on the use of renewable energy began in Israel in the late 1990s. In 1996, the Israeli government ratified the Kyoto Protocol, and in 2004, it approved the Kyoto Protocol. This was an addition to the United Nations Framework Convention on Climate Change (UNFCCC), under which the Israeli government committed to ensuring that by the end of 2020, 10% of energy production would come from renewable energy sources.

In 2008, in order to achieve this target, a government decision was made that required the Israel Electric Corporation to purchase electricity generated in independent photovoltaic facilities (solar energy production facilities) in Israel (both residential and commercial production). This decision is effective in a contract with the Israel Electric Corporation for 25 years, during which the company is obligated to purchase electricity at a fixed price not indexed to inflation.

This is one of many steps in the national plan to encourage the transition to solar energy (details will follow).

Subsidies, incentives, and tax credits

Many countries around the world encourage the shift to using solar energy, utilizing incentives for investors and manufacturers such as establishment grants, tax benefits, loans, and more. The impact of these incentives on solar energy production was significant in these countries.

In Israel, an incentive program for investors in the solar energy sector was developed; for example, in 2016, the state enacted the “Law to Encourage Investment in Renewable Energies.” This law provides tax benefits for home electricity producers on income from the sale of electricity generated from a renewable energy facility, as well as tax benefits for individuals on income from leasing land on which facilities for generating electricity from renewable energy are located, subject to the conditions and restrictions detailed below. The law applies to two types of renewable energy facilities that can generate electricity:

• a photovoltaic (PV) facility – generating electricity through sunlight
• a wind turbine – generating electricity through wind.

The full benefits and conditions are detailed in the Income Tax Directive 7/2019.

Another significant benefit among those offered to investors in renewable energy production facilities was first introduced in 2010 and renewed in the period 2018 to 2019; according to the regulation, a depreciation of 25% is imposed on a facility for generating electricity using solar energy, utilizing photovoltaic technology or solar-thermal technology.

Tax benefits for home electricity producers on income from their sale

The income from the sale of electricity by an individual will be considered income in the tax year in which it was accrued. An individual or a condominium association (house committee) generating income from the sale of electricity from photovoltaic facilities (solar panels) or wind turbines are eligible for one of the following:

• A full tax exemption track – complete exemption from income tax on the sale of electricity where the total amount in the tax year does not exceed a threshold of 24,000 NIS without VAT (updated for 2021).
• Reduced tax track – a final tax rate of 10% up to a ceiling of 99,006 NIS without VAT (updated for 2021).

There are additional exemptions and reliefs concerning the management of accounting books and exemption from filing a lawsuit and accounting. For example, an individual who generates income from electricity will not be considered a “business” according to the VAT law solely for this reason (subject to further conditions as detailed below).

Conditions for tax benefits from the sale of electricity

• As stated, the income producer is an individual or a house committee, the electricity produced is sold to a licensed essential service provider, the income is not from a business or an outreach effort, the facility is legally connected, the amount restriction as mentioned above, limitation on deducting expenses, restrictions on offsetting losses, etc.
• An individual who wishes to receive the tax benefits mentioned above is required to fill out form 1400.
• Those who own more than one facility are required to fill out form 1401.

It is recommended to first consult with a tax lawyer or a specialized accountant to ensure compliance with the required conditions for receiving the benefits for the relevant tax year.

Tax benefits on income from leasing land (whether a building or land) that has a facility for generating electricity

An individual who generates income from leasing land (whether a building or land) on which there is a device for generating electricity from photovoltaic facilities (solar panels) or wind turbines is eligible for one of the following:

• A full tax exemption track – complete exemption from income tax on leasing income where the total amount in the tax year does not exceed the threshold set for that tax year (5,000 NIS in 2021). The portion of income exceeding the threshold will be reduced from the exemption threshold (hereinafter: “relative exemption“) and for the amount of income after reducing the relative exemption – tax will be paid at a uniform rate of 31%.
• Reduced tax track – a uniform and final tax rate of 10% which will apply to the entire income amount without eligibility for exemption.

Additional exemptions exist as presented above, subject to compliance with the relevant conditions.

Conditions for tax benefits from income from leasing land:

1. The income is not business income.
2. There is a written document by which the lessee confirms that the land is used for generating electricity from renewable energy.
3. A notification has been submitted to the tax assessor.”

Taxation of income from solar panels: The issue of registration and VAT liability.

1. An individual whose entire business transactions consist of selling electricity and whose total business turnover does not exceed 24,000 NIS will be exempt from registration as a business and from reporting. Anyone whose entire business transactions are rental as specified by law is also exempt. This means there is no need to open a file with the Income Tax and VAT authorities.
2. An individual who deals in the sale of electricity and is registered as an exempt dealer, and whose total business turnover, including other transactions, does not exceed 99,893 NIS (in 2021), will report, once a year, on his business turnover including from the sale of electricity as part of the reporting as an exempt dealer.
3. An individual who is involved in leasing land and has another business, is required to register (open a VAT file) and report according to the VAT law. Those registered as exempt dealers whose total business turnover including transactions from the sale of electricity exceeds 99,893 NIS, will change their classification from exempt dealer to authorized dealer and will report on all their transactions.

How to invest in solar energy

Investing in solar energy requires an initial investment that includes the installation of solar panel roofs (infrastructure, inverters, installations, etc.). There is an option to finance the investment through banks or financing companies which offer loans with attractive interest rates. Investing in solar energy is considered a secure investment as the state significantly encourages the use and investment in solar energy. Moreover, there is a significant difference between the return (about 15%) and the interest rate (about 3.5%), making this investment channel particularly profitable.

Manufacturers usually advertise that the return on investment occurs within 7-10 years, with revenues obtained through two methods:

• Direct sale to the electric company at sale rates higher than the production costs.
• Domestic use of the electricity generated and sale of surplus electricity to the electric company at high and predetermined rates.

In our opinion, the correct economical way to look at the investment is different – one should not consider the time required for the return on investment but alternatively assume that the investment is spread over the period of use of the asset – that is, over 25 years.

If you take, for example, a solar system for an average roof of about 100 square meters. Such a system typically costs about 80,000 NIS and yields about 1,000 NIS per month. With a calculation using an amortization table at an interest rate of 3.5%, we reach a repayment of 400 NIS per month (note – repayment! That is, a combination of principal and interest payments), while the monthly profit (net income after taxes) stands at about 1,000 NIS.

Taxation of income from solar panels – A look to the future

As already mentioned, the State of Israel has consistently set fundamental guidelines and targets for the coming years to implement and improve the handling of environmental impact through renewable energy. At the end of 2020, the Israeli government approved the increase of renewable energy targets from 17% to 30% by 2030. Therefore, it is likely and entirely possible that in the near future, we will see further changes and incentives to encourage investment in solar energy.

To ensure compliance with the conditions required to receive tax relief on income from solar panels and renewable energy, it is advisable to consult with a tax lawyer or a tax expert accountant. For consultation – contact us.