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On 20 November 2020, the Danish Ministry of Taxation tabled a bill to amend the Property Valuation Act and various other acts.

Among other things, the bill included a change of the valuation method for properties where wind turbines and photovoltaic (“PV”) plants are installed so that the land value of these properties is to be determined in proportion to the actual production of power. Instead of the current market value standard, the land value of properties with wind turbines and PV plants will thus be determined on the basis of the production capacity of the plants, which will have a significant impact on the land value and thereby on the land tax calculated on the basis of the land value. 

The background to the change of the valuation method is that wind turbine plants differ from other commercial properties in that there is no connection between the land value and the site area or the floor area, just as it is the intention of the bill to create correlation and harmonisation in the valuation methods for wind turbine plants and PV plants.

Seen in isolation, it is positive that the valuation methods for wind turbine and PV plants are standardised and harmonised as this will create transparency in the valuation. The “price” of this is, however, that the bill will result in a significant increase in the land value, which will result in a corresponding increase in the land tax that the owners of the property will have to pay to the municipality. 

Postponed to 2021
The amendment of the Property Valuation Act relating to determination of land value for properties with wind turbine and PV plants was not included in the bill that was put out to consultation in the autumn, and the industry has thereby not had the opportunity to contribute with its points of view. 

The industry associations appeared before the Tax Committee on 16 December 2020 and this resulted in the Minister of Taxation, Morten Bødskov, deciding to divide the bill into two parts resulting in the part of the bill relating to land values for properties with wind turbine and PV plants not being heard by the Danish parliament until some time in 2021, whereas the rest of the bill was adopted on 27 December 2020. This means additional time to ensure thorough processing of the bill, including input from the industry.

What does one have to prepare for?
As the postponement of the bill is based on a wish to ensure more thorough processing with the inclusion of industry players, etc., it naturally cannot be ruled out that the bill will be amended in the course of this processing, and consequently, it is difficult to make any qualified guesses at the present time as to what the final act will contain. In the below we have prepared an account of the original bill, where considerations regarding the contractual consequences will still be relevant in the assessment of the risk involved in existing as well as new land leases.

However, we expect to see that the act will involve considerable tax increases for property owners with wind turbine and PV plants, and that the act will be finally adopted in the course of 2021. But the scope and the exact effective date remain to be determined.

The original bill

Method of calculation
According to the currently applicable rules, the land value of properties with wind turbine plants and PV plants is determined on the basis of a market value standard. However, the rules are implemented in different ways, so that the land value for wind turbine plants is determined on the basis of the production capacity, whereas the land value for PV plants is determined on a price per square metre of land.  

The original bill would do away with this difference in the valuation of wind turbine plants and PV plants. In relation to properties with PV plants and wind turbines, it thus appears from the bill that the land value of these properties must be determined at the standardised total production capacity for a plant with the same production capacity as the plant multiplied by a standardised price of DKK 250 per MWh (2021 rates). The price of DKK 250 per MWh has been determined on the basis of an overall weighing of the market price levels of properties with wind turbine plants and PV plants. 

The standardised annual production capacity is determined on the basis of the total production capacity of the wind turbine plant or the PV plant as well as on the basis of the market standard for the amount of MWh that a typical plant with a corresponding production capacity is able to generate in a standard year with typical wind and solar conditions.

However, the determination of the standardised annual production capacity is problematic, as it is, for PV plants, based on a standard year with typical solar conditions. This is not expedient in respect of PV plants, as there are, even for a small country such as Denmark, major differences in the intensity of the sun from region to region. Typical solar conditions in the south of Funen and the north of Jutland thus cannot in reality be compared.  

Background to the bill
The background to the change of the valuation method is that wind turbine plants differ from other commercial properties in that there is no connection between the land value and the site area or the floor area, just as it is the intention of the bill to create correlation and harmonisation in the valuation methods for wind turbine plants and PV plants. 

The new valuation method will thus mean that the land values of properties with wind turbine plants and PV plants will be assessed on the basis of the same general approach and will have the same land values if the annual production capacities of the plants are identical, which seen in isolation is a quite sensible idea. What is problematic, however, is the determination of the standardised price of DKK 250 per MWh. 

Determining the land value

Wind turbines
Today, if a wind turbine has been erected at the property, it triggers a calculated increase in the land value. Similarly, an increase in the land value will be calculated in the form of the value of a potential right to erect wind turbines. Currently, a wind turbine of 1 MW triggers an increase in the land value of DKK 80,000. 

According to the calculation method in the bill, a wind turbine plot with a 1 MW wind turbine will result in a land value of DKK 500,000, which is found by multiplying the capacity with an assumption of 2,000 full-load hours and a standard price of DKK 250 per MWh. 

As a further example, a 4.2 MW wind turbine will today trigger an increase in the land value of DKK 300,000. According to the calculation method in the original bill, a wind turbine plot with a 4,2 MW wind turbine will result in a land value of DKK 2,100,000, which is found by multiplying the capacity with an assumption of 2,000 full-load hours and a standard price of DKK 250 per MWh. This increase will thus result in a significant increase in the land tax payable to the municipality.  

In relation to this, it should also be noted that the Ministry of Taxation in its calculation example has calculated the production at 2,000 MWh for wind turbine plants, which is considerably less than the most recent basic projection for 2020 of the Danish Energy Agency, which operates with 3,400 MWh for wind turbine plants. It is consequently not unthinkable that in future we will see additional increases in the land value, if the Ministry of Taxation decides to adopt the basic figures of the Energy Agency.

PV plants
With respect to PV plants, the land value is currently determined on the basis of a market value standard according to which the value is based on the financially best possible utilisation of the site. This means that an increase for PV plants is not calculated in the same way as for wind turbine plants. 

According to the calculation method in the original bill, a PV plant with a production capacity of 50 MW will result in a land value of DKK 11,250,000, which is found by multiplying the capacity with an assumption of 900 full load hours and a standard price of DKK 250 per MWh. As a further example, a PV plant with a production capacity of 100 MW will result in a land value of DKK 22,500,000 according to the calculation method proposed in the bill. 

In respect of PV plants, it should also be noted that it follows from the original bill that if the calculation method according to the bill, which is based on production capacity, results in a price lower than the market price of farm land in the area where the PV plant is constructed, the market value of farm land will be applied. 

This increase will thus result in a significant increase in the land tax payable to the municipality.  

In relation to this, it should also be noted that the Ministry of Taxation in its calculation example has calculated the production at 900 MWh for PV plants, which is considerably less than the most recent basic projection for 2020 of the Danish Energy Agency, which operates with 1,300 MWh for PV plants. It is consequently not unthinkable that in future we will see additional increases in the land value, if the Ministry of Taxation decides to adopt the basic figures of the Energy Agency.

Contractual consequences
For existing plants, the valuation will depend on whether the risk lies with the land owner or the developer (if a party is both land owner and developer, the risk will always be placed with that party). 
For existing plants where the lease does not govern how amendments to an act or specific tax-related consequences are to be handled, the general rule is that the land owner bears the risk of any increases in the tax base. If the lease in full or in part addresses the issue of statutory amendments and tax-related consequences, it will be based on a specific assessment of the lease in question. 
For existing leases, we see a trend toward a division of the risk between the parties of future statutory amendments, and if an amendment is adopted, a calculation and/or negotiation will be required of the allocation of the increased tax base.

For future leases, the outcome depends on the specific negotiations. 

Our assessment
There is no doubt that the original bill would have business consequences for both existing and future wind and PV projects. In respect of current projects, an assessment has to be made as to whether the land owner or the developer bears the risk of the increased tax base and in respect of future projects (for which a lease has yet to be concluded), the consequence of the increased tax base must be placed with one of the parties to the lease. It is our assessment that for future projects the risk will be placed with the land owner either in the form of a lower rent value and/or in the form of the allocation of risk to be effected for any future increases in the tax base.