On May 13, 2014 Law 1715 of 2014 entered into effect. The Law is intended to promote the development and use of “non-conventional renewable energies” into the National Energy System (“NES”) by incentivizing their incorporation into the national electric grid, and their use in off-grid areas.
The Law defines Non-Conventional Energy Sources (“NCES”) as energy resources available worldwide that are environmentally sustainable, but not used or marginally used, including nuclear energy, and Non-Conventional Renewable Energy Sources (“NCRES”), which in turn comprise: (i) biomass; (ii) small hydroelectric; (iii) wind; (iv) geothermal; (v) solar; and (vi) the seas.
It requires the Government to foster power generation from NCES, as well as energy efficiency, through several means such as issuing policy guidelines, technical regulations and tax incentives.
In particular, it orders the Government to (i) promote small scale self-generation and distributed generation by authorizing self-generators to deliver power to the distribution (regional and local) grid, and also by establishing bi-directional metering and a system of energy credits to remunerate distributed generators, in each case subject to technical regulations to be issued by the Regulatory Commission of Energy and Gas; and (ii) implement a program to progressively replace fuel oil in off-grid areas by creating temporary exclusive service or monopoly areas where a single company may provide electricity generation, natural gas or LPG supply services and by establishing other incentives for generators to replace fuel oil with NCES.
The Law additionally establishes the following specific tax incentives for research, development and investment in the production and sale of energy from NCES:
- Companies that invest in projects related to the production and use of energy generated by NCES may deduct annually from their income, for the next five years following the year in which they made the relevant investment, up to 50% of the value of the investment, provided that the deductible amount does not exceed 50% of the taxpayer’s net income before subtracting the value of the investment. A certification issued by the Ministry of Environment will be required for its application (Article 11).
- National or imported equipment, machinery, accessories and services, for pre-investment or investment in the production of energy through NCES, and for the measurement and assessment of potential resources are not subject to VAT (currently at a 16% rate). A certification issued by the Ministry of Environment of the equipment and services excluded will be required for its application.
- The importation of equipment, machinery, accessories and services for the investment in the production of energy through NCES, will not be subject to customs duties.
- Machinery, equipment and necessary civil works for the investment in the production of energy through NCES, will be part of the accelerated depreciation regime. For these purposes, the annual rate of depreciation shall not exceed twenty percent (20%) of an overall annual rate.
Finally, it is important to consider that NCES projects could be developed in a Free Trade Zone. This would allow companies to pay 15% instead of the general income tax rate of 25%. Additionally, if the project is developed in a Permanent Free Trade Zone established before December 2012, the company will also be exempt from CREE tax over profits, paying only payroll taxes, which will result in an additional tax reduction of 9% for fiscal years 2013- 2015 and 8% as from 2016.