Asset management

Due Diligence in Solar Acquisitions: Taxes and Technical Details


17 May 2017 by Jordan Kouzmanoff, Solarplaza

On May 9, 2017, Solarplaza organized the webinar “Due diligence activities in a solar transaction in Japan”.


Due Diligence


On May 9, 2017, Solarplaza organized the webinar “Due diligence activities in a solar transaction in Japan”. Eugene Roussin, partner at KPMG, and David Vallejo, executive director at Solarig joined the webinar as speakers and discussed tax issues related to the acquisition of solar projects and the main technical considerations in assessing the current performance of a solar asset. The entire video recording of the webinar and the speakers’ slides can be freely accessed here.


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Key takeaways

  • Direct asset acquisition is the optimal way to acquire solar assets without unnecessary tax burdens, but often is not a feasible option in practice;

  • Equity acquisitions require tax DD and can present some ongoing structuring considerations that buyers should be aware of;

  • Technical assessment can be a long and grueling process, but knowing the right steps can mean the difference between failure and success.


Avoiding Tax Pitfalls

Solar transactions are a challenging task, doubly so when there is a cultural barrier that must be surmounted. The realm of taxation and tax structures makes up the bulk of the difficulty of such transactions. It is as byzantine as it is vital to their success and must be rigorously considered.

A frequent adage among tax professionals is to always strive to acquire assets whenever possible. Of course, sometimes commercial or legal factors may necessitate other structures, but from a tax perspective assets are the gold standard.

The reasons for this are plentiful: by default there are no contingent tax liabilities, there is no difference in the inside - outside basis (a difference arising between the project company's tax basis in the underlying assets versus the tax basis the buyer holds in the project company ).

In addition, assets offer a great deal of freedom, both in terms of structuring and asset allocation. Depending on your needs, you may opt to use structures of any complexity and you won’t be limited by what the seller had originally arranged for the asset.

Determination of asset allocation also becomes more flexible  [KPMG: Would prefer not to go into details on this]

Ultimately, however, asset acquisitions tend to be more difficult to effect in practice; the difficulty in arranging and executing an asset acquisition is daunting, especially considering the necessity of transferring numerous specific agreements and permits involved in the process. In case the counterparty is an offshore entity or an individual, they are very likely to incur additional negative tax implications compared to an equity transfer.

Acquisitions via different means run into the above-mentioned difference between the inside and outside basis. Regardless of whether the acquisition is structured as a Tokumei Kumiai (TK) or as equity, when the entity is acquired at a premium, the inside basis is not adjusted.

This results in a higher outer basis that is not reflected in a step up of the basis in the assets. Of course, depending on the investment horizon this difference may be mitigated as the impact of the lower basis may be recognized over a lengthy holding period. A lower asset tax basis will also result in a lower depreciable assets tax. If the project entity gets sold again, the inside-outside basis difference will shift on the next buyer as well.

The flavor of the month among investors is the use of TK structures, which are generally touted as being more tax efficient and having greater flexibility than equity structures. Acquisition of equity in a project company and conversion into a TK structure is possible, but is not without its difficulties.

In addition to potential issues arising from the form of the acquisition structure, another issue that comes up often in secondary market acquisitions involved development fees. As the level of solar industry expertise in the country is still relatively low, much of the development work is conducted by and paid to offshore entities. To the extent such work is not performed in Japan, these development fees should not be subject to Japanese tax; as a result, it should be expected that a company that has paid large development fees could earn the scrutiny and suspicion of the tax authorities.


Technical Assessment Walkthrough

Assessing the performance of a solar asset is nothing less than an art: between the involvement of dozens of parties, thousands of data sources and the threat of unpredictable risk, few can flawlessly navigate the strait between risk and failure.

Before even looking at the asset itself, it is important to know who is who. Knowing the roles and status of the client, the lender, the current owner, advisors, EPCs and O&M firms is vital, as is establishing communication with them. When dealing with a major solar asset, everyone who has been involved with it must be taken into account.

In most cases of asset acquisition, the asset in question will already be operational. Thus, most of the time the design and construction phases of the project have already passed. This leaves three possible states for the asset: whether it has passed its Commercial Operations Date, whether it has gained its Provisional Acceptance Certificate, and whether the Final Acceptance Certificate has already been released.

A rule of thumb is to analyze all of the information available, but what specific details should a potential buyer put the most value on? From experience, Solarig has compiled the following list of important technical information to keep in mind (in no specific order):

  • Exact coordinates and Google Earth file (.kmz extension);
  • Layout complete with a topographic survey and shadow concerns;
  • AC/DC single line diagram and cable layout;
  • Mechanical drawings and PV panel layout;
  • Module, inverter, transformer and substation technical specifications.

In addition, a vigilant buyer should also go over the EPC and O&M contracts, all available warranties, historical data and data on any incidents.

In terms of schedule, a standard technical assessment should last for about six weeks: one week of contract negotiation, followed by another week to collect all relevant information. The main technical review can take up to two weeks, and once cleared it will be followed by an on-site inspection. The visit should last at least two days, preferably during sunny weather to examine realtime performance. Further technical reviews may or may not be warranted, depending on the state of the asset, and a final report with conclusions should take no more than two weeks to finish up.


Learn more about the ins and outs of a solar transaction in Japan at the Solar Asset Management Asia (8-9 June 2017, Tokyo), Asia’s leading conference dedicated to Solar Operations & Maintenance and Asset / Portfolio Management.