No investment tax credit for photovoltaic systems where the majority of the electricity is consumed on-site

For many households and small businesses, solar power systems have long been more than just an environmental statement. They are also seen as a practical way to reduce electricity costs over the long term or to generate income by feeding electricity into the grid. However, from a tax perspective, the classification is not always as straightforward as it seems at first glance. A recent ruling by the Hessian Finance Court now provides clarity once again—particularly with regard to the investment deduction (IAB) under Section 7g of the German Income Tax Act (EStG) and the use of photovoltaic systems in private settings.

What was the specific case about?

In 2021, a taxpayer claimed an investment deduction for the planned purchase of a photovoltaic system on the roof of his private residence. The system was actually installed the following year. In 2022 and 2023, however, the taxpayer’s household consumed over 90 percent of the electricity generated itself. Thus, only a small amount of electricity was fed into the public grid. No further business activities or investments took place.

The competent tax office subsequently denied the previously claimed investment deduction. This was justified by the lack of business use of the system as well as by the fact that the requirements for an investment deduction were not met under these circumstances. The case ultimately ended up before the Hessian Fiscal Court.

The Decision of the Hessian Finance Court

The judges of the 10th Senate concurred with the tax office’s assessment and clarified: A photovoltaic system whose generated electricity is not fed into the grid or sold to at least 90 percent is not considered to be (almost) exclusively used for business purposes. Thus, there is no basis for claiming an investment deduction.

The court emphasized that actual electricity consumption is the determining factor. If the majority of the electricity generated is used in the owner’s own household, there is no business use in the tax sense. However, under Section 7g of the Income Tax Act (EStG), the investment deduction is only available if the asset is acquired almost exclusively for business purposes.

In this case, the plaintiff had consumed almost all of the electricity himself. Consequently, the photovoltaic system could not be classified as a qualifying asset, and the investment deduction was rightly not recognized.

Significance of the Decision for Practice

The decision has far-reaching consequences—particularly for taxpayers who operate a photovoltaic system in a private setting and wish to claim tax benefits in advance. While operators of small PV systems may generally be considered entrepreneurs if they feed electricity into the grid and generate revenue, However, if the electricity generated is predominantly used for personal consumption, the system loses its business character—at least for the purposes of qualifying for an investment tax credit.

In addition, since the 2022 Annual Tax Act, certain photovoltaic systems have been exempt from income tax (Section 3 No. 72 EStG). This tax exemption applies retroactively to many smaller systems on single-family homes and means that income from feeding electricity into the grid is no longer taxed. Consequently, the question may also arise as to whether IABs already established are still permissible retroactively—or whether they too are no longer valid. These points were not decisive in the case at hand, but they illustrate how complex the issue has become.

What You Should Consider Now

If you are considering purchasing a photovoltaic system and wish to take advantage of tax benefits, you should discuss your planned use with a tax advisor at an early stage. The decisive factor is how the generated electricity is used—not only in the year of purchase but also in subsequent years. If a significant portion of the electricity is used for private purposes, tax benefits such as the investment deduction can quickly be at risk.

It is particularly important for private households with side businesses, rental properties, or commercial side activities to ensure a clear separation between private and business use. On the other hand, those who opt for nearly complete grid feed-in from the outset may, under certain circumstances, continue to benefit from tax incentives.

Conclusion: Advance consultation is crucial

The decision by the Hessian Finance Court clearly shows that the tax treatment of photovoltaic systems must be considered on a case-by-case basis. A well-intentioned investment can be a tax loss if the actual usage does not meet the requirements.

If you, as a business owner or private individual with income from rental properties or other activities, wish to invest in a PV system, we, as tax advisors in Düsseldorf and Oberhausen, are happy to assist you with tax planning. We will check for you in advance whether and how an investment deduction is possible—thus avoiding unpleasant surprises later during a tax audit.