The wind-swept area of Dobrogea, cornered by the Danube River and the Black Sea, has caught the eye of many strategic investors. They seek long-term profits in a country whose infrastructure is far from being able to support the potential that the region can offer in green energy.
Investors are squeezing into Southeast Romania, erecting windmills at a speed that far outpaces the transport capacity of the existing power grids. And as high hopes and optimism die last in business, they are not planning to stop here.
Studies for nearly 40,000 MW have been conducted and applications for grid connections have been submitted. As a comparison, only 2,600 MW are already operational or expected to be commissioned by the end of 2012.
But even if everything goes as planned and the Romanian government and the regulators put in place enough power grids to transport energy to final consumers, problems still persist.
Indeed, while it is true that land ownership for turbine footprints, legal issues, technological erection platforms or access road to turbines can pose big problems during the investment phase, the financial side can turn out to be crucial at some point.
Building a wind mill requires a great deal of financial effort, starting from the installation and lasting throughout the entire process of the construction, until it finally goes on line.
Investors should not disregard or minimize the fiscal implications in either of the construction phases.
STRUCTURING THE INVESTMENT IN A TAX EFFICIENT MANNER
The decision to invest in one country depends on various parameters. Although not a decisive factor, tax is one of the main aspects to be considered, especially in today’s business climate. Therefore, before making such a decision, the potential investor should be interested in structuring the investment in a manner that would optimize the tax-structure.
There are two main alternatives to invest in a wind power project: acquiring shares in a company or directly acquiring the assets from a company. Each of these options has its advantages and disadvantages, thus it is recommended to perform an analysis for each specific case. Several aspects have to be taken into consideration, such as tax implications at the acquisition moment, during the period when the activity is performed and also when disinvestment occurs.
Generally, there should be no corporate income tax implications for the buyer at the moment when shares or assets are acquired. However compliance obligations could arise under certain conditions. That would imply extra costs and extra time.
Financing and operational phase
Financing is a key aspect for wind power projects which may be performed either by providing a loan or by increasing the share capital of the operational company. Tax implications would differ depending on the type of financing provided.
More specifically, if a loan is granted, one should analyze the tax implications related to the interest paid to the beneficiary: deductibility of interest expenses, withholding tax if the beneficiary is a non-resident. In the case of a contribution to the share capital, the tax implications would be analyzed in connection with the dividends paid to the shareholder. Consequently, the taxable base may be significantly increased by the non-deductibility of interest expenses.
16% withholding tax would be due in Romania if the shares are acquired by a non-resident legal entity for the following types of income: dividends, interest, services rendered in Romania or management and consultancy services. Nevertheless, under certain conditions, the withholding tax rate may be reduced down to nil.
Last but not least, the investors would be interested in the tax implications arising in Romania if they decide to sell the shares in the operational company. Generally, the capital gains tax at 16% is applicable on the profits obtained by a non-resident legal entity upon the sale of shares in a Romanian legal entity.
In all stages mentioned above, transfer pricing implications should be considered if transactions are performed between related parties.
The existing fiscal incentives should not be ignored. Accelerated depreciation is one of them.