Significant tax aid for green investments in the pipeline

Context and framework

Following the war in Ukraine, the EU published a Temporary Crisis Framework for state aid exceptions to support economies of the EU Member States. The Temporary Crisis Framework includes time-limited and specific exceptions to state aid rules enabling Member States to adopt state aid schemes directly supporting private investments with strategic importance for the transition towards a net-zero economy. As the question is about an exception to the state aid rules, the local laws cannot exceed the framework set by EU, although Member States may enact the laws with narrower exceptions than allowed.

The main limitations resulting from the Temporary Crisis Framework, and thereby also forming the local legislation, are in particular:

• The total amount of tax credit may not exceed €150 million per project company, although this limit may be increased for certain regions. The limit also covers direct grants, interest subsidies on loans and guarantees.
• According to Commission, eligible projects could include in particular production of batteries, solar panels, wind turbines, heat pumps, electrolysis equipment and equipment for the capture, recovery and storage of carbon dioxide, the production of key components directly intended for the manufacture of such equipment and the production or recovery of critical raw materials needed for the production.
• Eligible costs include investment costs relating to real estate, buildings, factories, equipment and machinery required for the production or recovery of equipment essential for the transition to a net-zero economy. Costs relating to intangible assets may also be eligible, but there are substantial additional restrictions on eligibility.
• In principle, the amount of aid may not exceed 20% of the eligible costs. The exception allows an increase in aid for investments by small and medium-sized enterprises.
• The right for Member States to grant aid will expire on 31 December 2025, unless prolonged by the Commission.

At least France has so far enacted a local law based on the exception referred to above. The French regulation is broadly in line with the allowed maximum limits set by the Commission. In particular, the French regulation targets new investments in new generation batteries and key battery components, solar panels, wind turbines and heat pumps. Plans for eligible projects must be approved in advance at ministerial and agency level.

Insights on the planned legislation in Finland

The timetable for planning and implementing the Finnish green investment tax credit act can be considered very tight, especially if the law is implemented more restrictively than what the Commission's guidelines would allow. As it is specifically an incentive for new projects, operators should consider whether it is worthwhile starting a potentially eligible green investment project before the law enters into force, as the early investment decision could probably lead to a loss of eligibility for the aid.

In addition, the basis of the model presented by the Finnish Ministry of Finance is a tax credit-based model. In Finland, investment grants have typically been implemented as increased depreciations, which have not per se required the relevant company to generate any taxable income. On the other hand, in the investment credit model, the decision to grant the aid will be strictly time-limited but the right to use the aid would likely not be time-limited. In practice, the aid will materialise for the project company as of the moment when the project company starts generating taxable income and the tax losses incurred in the initial investment years have been utilized. It can therefore be assumed that the period of utilizing of the aid, and thus the adverse tax revenue impact on the economy, will be spread over a very long period of time. At the same time the tax aid may even be a decisive factor in the viability of long-term green investment project.

When assessing the Finnish tax system as a whole, interesting questions relate e.g. to whether and how group contributions are fitted in the model, does the credit affect calculation of the global minimum tax and whether the aid is considered purely company-specific or could e.g. change in ownership, merger or demerger lead to loss of the aid even if the investment would remain in its original area.

Another interesting question will be the process required for receiving the tax credit, the evidence required in practice for a positive decision and the timeframe for processing applications. Further, the introduction of the Finnish compensation model will also require the approval of the EU Commission. The timetable set for the legislator is therefore tight.

Our views on the planned green investment tax credit

According to the growth package of the Finnish government, the government is preparing to implement the green investment tax credit, which does not necessarily indicate that implementation of the tax credit would be certain and whether it would eventually be implemented narrower than allowed by the Commission.

When the similar green investment tax credit system was implemented in France, it was estimated that the aid would generate investments worth €23 billion and 40,000 new jobs by the end of decade. In our view it’s also essential that the project company may utilize the tax credit only as of the moment when the company would be in tax-paying position. As the question is about significant green investments, it is reasonable to assume that the investment would directly generate tax revenues to Finland even after the credit has eventually been fully utilized.

Based on our experience, the major challenge in green investments is financing the project at the planning and starting phase. The model would not solve this problem. On the other hand, it naturally would make the significant projects more feasible when assessing the cash flows of the project as a whole.

Should the green investment tax credit be implemented and in case it leads to implementation of even one significant green investment project in Finland, the model can be considered highly justified from the point of view of the national economy.