Trade in Guarantees of Origin – Legal Framework and VAT Regime

Author: Attorney at Law Vojinović B. Milan and legal trainee Keković Sara, Law Firm “VUK Tax Attorneys”

Date: 29th December 2023

Legal Framework

In accordance with Serbian Law on Use of Renewable Energy Sources (hereinafter: the “RES Law"), guarantee of origin is an electronic document that exclusively serves to prove to the final consumer that certain quantity of energy is produced from renewable energy sources. Guarantees of origin can be traded independently and separately from the electricity itself and they do not represent a physical product. Instead, they are sold as electronic certificates or attributes of production, confirming that specific quantity of electricity is produced from renewable sources. Guarantee of origin can be issued to producer of electricity from renewable sources. for unit net quantity of 1 MWh of electricity produced. Period of production for which the guarantee of origin is issued, is calendar month.

The RES Law regulates relevant aspects of using energy from renewable sources, establishes foundations for the development of RES in the Republic of Serbia, and defines role of the transmission system operator "Elektromreža Srbije” (hereinafter: "EMS"). EMS is authorized to issue guarantees of origin, as well as to manage the Registry of guarantees of origin. To ensure transparency, electronic registry is publicly available on the EMS’ website, containing information about issued guarantees of origin, including fees for issuance, transfer, and expiration thereof. Guarantees of origin can only be issued to producers from renewable sources who registered their power plant in the Registry of guarantees of origin. EMS issues guarantees of origin based on the producer's request and data on electricity production which it obtains ex officio. Content of the request for issuing guarantees of origin, submission method, conditions and method for issuance, are determined by EMS in accordance with the Rules on Issuing Guarantees of Origin. Request for issuing guarantee of origin can be submitted to EMS in electronic form, not later than six (6) months from the last day of the electricity production period for which the guarantee of origin is requested, and not later than 15th March of the current year for production from the previous year. Period covered by the guarantee of origin cannot be longer than one (1) year, whereas guarantee of origin itself is valid for one (1) year, counting from last day of the period for which it is issued. Valid guarantees of origin can be transferred between users of the Serbian registry. Having regard that EMS is member of European Association of Issuing Bodies (AIB), guarantees of origin issued in other countries, are recognized in accordance with AIB’s rules.

Value Added Tax (VAT)

Legal nature of guarantees of origin is questionable from the perspective of tax regulations, especially Serbian Law on Value Added Tax (hereinafter: the "VAT Law"). In our opinion, trade/exchange of guarantees of origin cannot be clearly classified under sale of goods or provision of services, in the context of the VAT Law. Namely, the VAT Law clearly defines what constitutes supply of goods and services, specifying that goods include water, electricity, gas, and heating or cooling energy. but not electronic documents which prove that certain quantity of energy is produced from renewable sources, nor it contains term such as “guarantee of origin”. Consequently, we believe that trade/exchange of guarantees of origin cannot be clearly categorized under general regime provided for supply of goods and services in the VAT Law, as it is not specified whether guarantees of origin, as such represent goods or services, considering they are accompanying products derived from the production of electricity as a good.

Similar to securities traded on the stock exchange, guarantees of origin also have market value and can be exchanged on the stock exchange or through specialized electronic platforms. The possibility of trading on the stock exchange places them in the context of financial instruments, setting them apart from standard definitions of supply of goods or services defined in the VAT Law. Trading guarantees of origin on the stock exchange allows buyers and sellers to buy or sell these electronic documents, making them similar to financial instruments such as stocks or bonds. This further emphasizes the need for more precise definition of their legal status within tax regulations. Buyers include energy suppliers or large energy consumers, who can then resell them to another supplier. When such supplier sells/delivers respective quantity of electricity to the final consumer, guarantee of origin is utilized and ceases to exist.

To our knowledge, users registered in the EMS Registry of guarantees of origin (mostly licensed electricity producers and suppliers) apply general rules for supply of services defined by the VAT Law when trading guarantees of origin, either domestically or cross-border. When internal trade with guarantees of origin occurs in the Republic of Serbia, seller of the guarantee of origin charges VAT at the general rate of 20% on the sales price. When selling guarantees of origin to a foreign buyer, VAT is not charged on the basis of rules on place of supply, which, in this case is abroad. We believe that domestic traders, by acting in this manner, do not apply correct VAT regime when trading with guarantees of origin and that in this regard, they should apply VAT regime provided for securities. Namely, guarantees of origin have similar status and function as securities, so when trading guarantees of origin, the VAT regime provided for trade with securities could be applied. For trade with securities, VAT exemption is applicable without right to deduct input VAT. Consequently, traders/suppliers would not calculate and pay VAT when it comes to selling guarantees of origin in the territory of the Republic of Serbia. Also, VAT would not be charged on cross-border trade with guarantees of origin.

In some EU countries, there are written instructions or detailed explanations from state authorities, issued for the purpose of legal certainty, regarding taxation of trade with guarantees of origin, to avoid negative consequences for taxpayers active in this sector, as the amounts of transactions of a kind are not negligible, on the contrary.

Our law firm will timely and carefully monitor all upcoming activities in this area, to efficiently assist clients with our significant experience and expert analysis, in resolving ambiguities and successfully implementing investments.