Designing the legal mechanism to account for the relevant transfers of funds is an ultimate ambush.
What would be the legal form (what kind of agreement, sale, donation, other) of the purported transfers between companies taking part in the operations for the transfer of funds, how these operations would be accounted for, what form of taxation to apply (as regards VAT, CIT), and what would be the effects of these processes on the profits of the company – all these matters require analysis.
1. Matching the values of investments with free allowances
Continuing the remarks regarding legal consequences of the Communication from the Commission, Guidance document on the optional application of Article 10c of Directive 2003/87/EC (2011/C 99/03, OJ C 99, 31.3.2011, p. 9) it is worth to focus on the element of the most practical importance i.e. the balancing mechanism between amount of investments and free emission allowances.
The provisions of the Directive 2003/87 were ambiguous on the point whether the value of investments listed in the national plan should be exactly matched with the value of emission allowances allocated free of charge, at the level of the Member State as a whole or at the level of each particular operator. The settlement of these two parameters within the entire Member State would undoubtedly be much easier than adjusting the said values for each economic operator. The second approach also entails further complications.
In the guidelines, the Commission determined the required content of the national plan for investments. Pursuant to the point 30 of the said guidelines, in their national plans, Member States should set out four categories of information:
1) the list of installations undertaking investments identified in the national plan,
2) the list of investments scheduled to result from free allocation of emission allowances,
3) the specification to which extent the said investments will be funded by gains from emission allowances allocated free of charge,
4) the determination in which year of the investment cycle this would occur.
The Commission further argues that where companies receive emission allowances for free without undertaking such an investment or where they receive more emission allowances for free than necessary to undertake the relevant investment(s) identified in the national plan, they must be required to provide the value of the excess allowances to the relevant entity undertaking the investment.
It follows that a national plan should, according to the Commission view, be matched at both levels – the national and that of operator’s. It needs also to be detailed as regards the time-schedule. Taking into account the amounts that are at issue it looks like a huge organisational effort and challenge - within very limited deadlines.
2. Designing the measure for transfers – final challenge
Assuming that a recipient of emission allowances allocated for free under Article 10c of Directive 2003/87/EC would need to use the value of the free emission allowances by means of undertaking an investment identified in the national plan, a discrepancy is apparent between the catalogues of entities eligible for free allocations and sorts of investments eligible to be included in the national plan.
As to the investments, they should generally concern the electricity sector and are to be undertaken from 25 June 2009 (the Commission reserves, however, that as a matter of principle, investments in other energy sectors are not excluded, on condition that they benefit from strong justification on the basis of Article 10c of Directive 2003/87/EC). Article 10c(1) literally enumerates the sorts of investments eligible to be included in the national plan and these are investments in retrofitting and upgrading of the infrastructure, clean technologies, diversification of energy mix and sources of supply.
Under Article 10c the operators potentially eligible for allocations of free allowances are, however, installations for electricity production subject to compliance with the Union scheme.
The problem is that not all companies that could be designated to undertake investments identified in the national plan are compliance entities within the Union scheme potentially eligible to receive allowances allocated free of charge.
The categories of entities like e.g. operators of transmission or distribution systems and operators of renewable electricity generation would therefore not be able to receive free allowances, but may nevertheless be required to undertake investments identified in the national plan.
It follows therefore from the Directive and is expressly confirmed by the Commission that a mechanism to account for the relevant transfers of funds between the said two categories of companies is needed.
The Commission does not analyse in the said guidelines this issue in greater detail and leaves the particulars of the design of the specific legal measure for these transfers (and, consequently, the entire problem) to the competence of the Member States.
But it is an open issue what would be the legal form (what kind of agreement, sale, donation, other?) of the purported transfers between companies taking part in the said operations, how they would be accounted for, what form of taxation to apply (as regards VAT, CIT), and what will be the effect of this process on the profits of the company.
It is also worth underlining that company undertaking investments included in the list covered by the national plan is an independent entity (often with private shareholders) and aims first and foremost to make profit. Hypothetically, such a company may for instance change its mind as to the profitability of the said investment and withdraw from it after having received free allowances. How such a situations should be reflected in the possible agreements between the participants of this scheme (including Member State)? Should there be any agreements on free allocations or not? And what, if the company goes bankrupt – should every company receiving free allowances under Article 10c give collateral to the Member State?
All this is much more complicated as from 2013 comparing with the first and second trading periods, where general rule was free allocation. In the third trading period the rule is opposite and this changes everything.
It is not the intention of this post to solve the above-envisioned problems. It is however worth noting that these issues have complicated and unprecedented character, and the companies risk getting involved in bothersome disputes with tax authorities and with the Commission enforcing state aid rules. The Commission clearly presented its stance that the said legal measure for transfers must be consistent with the state aid rules.
Having due regard to the mosaic of other issues involved (see above point 1, the matters envisioned in part I of these considerations, and many others for which the reader should refer directly to the Commission guidelines) making use of derogation provided for in Article 10c becomes very demanding task and requires much more detailed analysis.