Photovoltaic subsidies slashed

Amendments to the the feed-in-tariffs deals a blow to subsidies.  The Czech Republic faces débâcle in international arbitration disputes.

The feared change to the incentives to the production of solar power has become reality.  The Parliament has recently passed an income tax applicable to subsidized sales of electricity produced through  solar panels.  The tax will be withheld from the sale price and will be in force until 2013 for all plants which commenced operations from 1.1.2009 through 31.12.2010.  Tax rates of either 26% or 28% will be withheld from revenues, not profits.

Local and international investors risk displacement, as they see the advantages on which they relied turn into dust (including the promised 5-year exemption from income taxes).  The practical consequence of the new law is a one-fourth cut to the subsidies.  While this might make some projects go bust, returns on all other investments will certainly materialize much later than the assumed 15 years.

The constitutionality of the tax is dubious, since it appears to encroach upon several principles guaranteed by either the Constitution or the Charter of Fundamental Rights and Freedom: reasonableness of statal intervention, prohibition of arbitrary measures, protection of legitimate expectations.  Case law supporting thes principles already exists, also regarding tax issues.

Many businesses now consider to seek annulment of the law for uncostitutionality.  But especially local investors face a long path, since immediate judicial review of the law by the Constitutional Court cannot be obtained, unless the applicants are MPs (in the required number).  Some of them have already promised to endorse the application.

Many foreign investors are in a better position.  Besides the Constitutions, the promoters of the change seem to have failed to consider the Czech Republic's commitments under bilateral treaties on investment protection, and the risks connected to breaching them.  The Czech Republic has entered into over 80 such treaties with EU or non-EU countries.  Foreign investors may resort to international arbitration to obtain the compensation of the damages suffered as a consequence of the change in the law.  The verdict will be issued by arbitration courts made up of international experts on investment protection.  Some arbitration experts anticipate total defeat for the Czech state and see settlement as its best option.

The Czech Republic is not alone in backpedalling on solar subsidies.  Spain has slashed them after 2008.  In different forms, feed-in-tariffes are being reduced in Germany and France; Italy plans to do so, too.  Increases of the bills are among the main reasons for the change. The anger of consumers forced governments to reverse their steps.  They now face a bloody retreat.