The Taxation of Energy-Sector Assets: Polish Tax Legislation on the Eve of Energy Transformation

Hard coal played a special role in Poland for many years. It (and lignite) was the basis for the entire power industry. It was not only economically important, but also emotionally important, which was partly justified historically. During the communist era, coal mining and metallurgy based on hard coal was the basis of an economy focused on the mass production of weapons. Currently, the Polish economy is undergoing a transition from a coal-based economy to a low-carbon economy. This is also a major social change. The old coal-bearing regions must find new ways of development for themselves.

The regulation of real estate tax in Poland is characterised by both laconicism and vagueness. Regulations’ content alone does not usually allow a legal problem to be solved—Polish administrative courts’ jurisprudence must be referred to. Judgements of the Constitutional Tribunal are also important in these regulations’ practical application. In particular, the judgement of the Constitutional Tribunal of 13 September 2011(P 33/09.) influenced the scope of the taxation of industrial facilities. Indeed, as a result of this judgement, these facilities’ scope of taxation changed. It introduced formalistic criteria for determining whether a given facility is subject to the real estate tax, which is justified by the need to maintain constitutional standards.

The problem concerning the taxation of the facilities used to extract energy resources is most often (apart from lignite mines) linked to how the term ‘underground excavation’ is understood. Only the objects located in an excavation site can be taxed, not an excavation itself. As a result, the cost of conducting an excavation itself should not be included in the taxable objects’ value. Excavation equipment is quite complex, which results in difficulties separating the taxable construction part from the equipment. This problem is typical of the Polish real estate tax.

The assets used to transport and store energy raw materials (at the moment, mainly oil and gas) generate a significant tax burden because many of them are taxable construction objects that—due to their high unit value (tanks) or scale (pipelines running across the whole country)—are very highly valuable, which translates into a high tax base. At the same time, some areas in this respect are disputable, and such disputes’ resolution for the tax authorities’ benefit additionally increases this already high tax burden (the treatment of the accompanying infrastructure as an element of the structure and the treatment of tanks with the features of buildings as structures). This cost is not present in the case of renewable energy, which—by its very nature—does not require any infrastructure for the storage or transportation of energy resources. Therefore, due to the nature of Polish real estate tax regulations, renewable energy can be said to be doubly competitive with fossil energy Firstly, traditional energy requires expenditures on the construction of infrastructure to transport and store energy resources. And secondly, these expenditures largely increase the real estate tax base.

The interrelation between the real estate tax and the construction law makes a facility’s structural aspects crucial for taxation. With similar investment outlays, two plants may generate different tax amounts if one of them comprises mainly single-storey buildings filled with equipment while the other contains a significant amount of equipment with construction parts or large tanks. This specificity in Polish tax rules is very well illustrated by the taxation of various types of power plants. The amount of tax is not always determined directly by the cost of a given facility’s construction or, for example, its installed electric power but by the structural specifics of a given type of power plant. Coal-fired power plants are in a privileged position, with a relatively small proportion of the inputs qualifying to be taxed as structures. The total cost of energy production, in their case, also includes the tax to be paid by the coal mine. The cost of the tax on the source of the energy raw material is, of course, not present in the case of renewable energy. At the same time, due to their structural specificity (few buildings), a potentially large part of the outlays could be subject to a high tax as a structure (2% of their value per year). However, this circumstance is mitigated by the legislator and the jurisprudence, which allow for the most valuable elements of the installation (turbines at wind power plants and panels at photovoltaic plants) to be excluded from the scope of taxation. Quite unexpectedly—and, seemingly, accidentally—biogas plants, in which tanks play an important role, are disadvantaged in terms of taxation. Taxing tanks as structures significantly increases the amount of tax paid on such power plants, and attempts to change this state of affairs through interpretation have, so far, not succeeded.

Changes to the regulations governing the taxation of wind farms in Poland are a difficult-to-understand example of legislators’ irrationality. The uncontrolled construction of wind farms anywhere should, obviously, not be accepted because they can be a nuisance to local residents. However, the approaches so far to this problem can be described only as absurd. That the tax regulations which have undermined many wind power plants’ functioning were introduced accidentally is particularly sad. The jurisprudence of administrative courts is also difficult to assess positively. They have, de facto, accepted the low quality of tax law in Poland. Of course, one can understand that judges tried to shape wind power investments regulations rationally. However, one cannot accept a line of reasoning suggesting that, since an intertemporal provision has been applied, the content of the legal regulation has changed. The analysed legal regulation was simply so defective that it should be assessed by the Constitutional Tribunal. Fortunately, Polish legislators are gradually withdrawing from the solutions adopted in 2016.

The provisions of the L.T.C.A. governing land taxation introduce a general rule that land on which actual business activities are undertaken is taxed more heavily than other land. Apart from a purely fiscal function (a higher tax for entrepreneurs who derive profits from the land), this solution also plays a stimulation role in that the tax regulation encourages the taxpayer to occupy the land for business activity only in such an area and for such a time as are necessary. This condition is particularly important in the case of opencast mining, which has a particularly heavy impact on the landscape. The regulations in force motivate entrepreneurs to restore the land as quickly as possible as part of the reclamation process. In this context, whether protective strips are treated as occupied for business activity may be subject to doubts. Imposing maximum tax rates on such land discourages taxpayers from voluntarily surrounding their power plants or mines with a ‘green buffer’. On the contrary, entrepreneurs can profit by using the maximum legal area of their land if they pay the same tax on this land as they would on unused land. Therefore, this interpretation of the legislation not only fails to fulfil its protective function with respect to the land but may even have the opposite effect.

The considerations presented in this chapter have shown the difficulty of finding a solution that would, on the one hand, remove the loophole preventing the taxation of offshore wind farms and, on the other hand, remain compliant with the constitutional standards of tax lawmaking. The adopted solution allows legislators to achieve their objective of similar tax treatment for all electricity production methods. This goal has been achieved first by fixing concession fees to an amount which corresponds with the load of an onshore wind farm. The resultant constitutional problems were primarily caused by the de facto concealment of the tax under the name of a ‘concession fee’. Meanwhile, based on the Polish Constitution, the name of the service is not important but, rather, its features. Since this fee bears the features of a tax, it should first be regulated by a statute, whereas the adopted solution enables the fee amount to be determined by way of regulation. A moderate risk of recognising the regulation as violating the constitution has resulted from this approach. Another effect of replacing the real estate tax with a concession fee is to change the beneficiary of the income in question. While the real estate tax contributes to a municipal budget, the concession fee contributes to the central budget. Therefore, for taxpayers, the introduction of this fee is an economically neutral solution. (The amount has been established to correspond to the amount of the real estate tax paid for onshore wind farms.) But municipalities that counted on revenues from taxing offshore wind farms are disadvantaged by the adopted solution.

In the field of energy storage, drawing conclusions about whether conventional energy is preferential to renewable energy from a tax perspective, or vice versa, is difficult. Notably, while electrochemical storage facilities are mainly used by wind and photovoltaic power plants, conventional pumped storage plants are used for both types of power generation. Moreover, the tax rules favour, to some extent, electrochemical storage, whose value comprises almost entirely non-construction (and non-taxable) components. Pumped storage plants, on the other hand, are groups of significantly smaller facilities which, in addition to technical equipment, include a number of construction objects, subjecting them to the real estate tax to a much greater extent.

The issue concerning the property used to transmit electricity illustrates the unstable and largely unpredictable approach of Polish legislators and administrative courts to the real estate tax on energy infrastructure. Over the last quarter of a century, the situation has changed dramatically—from the tax exemption of transmission lines to their taxation and, finally (according to the latest position of the Supreme Administrative Court), to the taxation of the entire power grid with its associated equipment, such as transformers. The only positive gesture that legislators have made towards transmission operators are the changes described in this chapter concerning the taxation of the land under transmission lines. The surprising broadening of the scope for real estate taxation that we have described applies equally to conventional and renewable energy since both these branches use the transmission infrastructure equally. For conventional power generation, the backbone of the transmission network is, in principle, already in place, but it requires major upgrades over the coming years. For renewable energy sources, however, the creation of completely new sections of transmission lines is necessary to receive the electricity generated from power plants and distribute it around the country. In both cases, investments will increase the real estate tax base. Each extension to the definition of ‘structures’ in order to include the technical equipment connected to the power grid significantly increases grid maintenance costs.

The energy transition away from coal-fired power generation shifts tax revenues between municipalities. These revenues are more dispersed than in the case of the taxation of coal-based energy. In addition, renewable energy can develop better in hitherto poorer regions, especially those that have so far not been attractive for settlement and agriculture.

Equality is a constitutional principle in Poland. By nature, we expect everyone to be treated equally because we associate equality with justice. Of course, there are always questions in how equality is to be understood. Does it mean absolute equal treatment of all, or equal treatment of those who are similar, and different treatment of those who are significantly different? The natural question here is whether different rules on the taxation of facilities relating to different modes of energy production would breach the principle of equality.