The Finnish Supreme Administrative Court (the “SAC”) issued a significant precedent on 2 June 2021 that limits the application of the power plant tax rate in real estate taxation. The SAC held that a reserve power plant that is not producing electricity commercially should not be considered an item to which the power plant tax rate applies. The SAC overruled the prior decisions in the case and accepted the taxpayer’s claim that the general real estate tax rate should apply to the reserve power plant. Borenius represented the taxpayer in the proceedings.
In Finland, taxable real estate is subject to general or special real estate tax rates. All municipalities apply a general tax rate, but they may also impose special tax rates for certain types of real estate. One such special tax rate relates to the buildings and constructions of power plants. This typically allows the municipalities to collect higher tax revenues from power plants than it could have done under the general tax rate.
The legislature introduced real estate taxation in 1992 with the purpose of compensating municipalities for tax revenue losses caused by the income tax reform, which was implemented around the same time. The power plant tax rate was one of the measures that was adopted for this purpose. Over the years, the power plant tax rate has been applied to all types of power plants, but although this concept seems clear on its face, it has raised uncertainties in circumstances where the power plant involved is primarily used for other purposes and not for commercial electricity production.
The SAC’s precedent
In the case, the taxpayer served as the operator of the Finnish national grid. In its role as the transmission system operator, the taxpayer ensured the proper functioning of the grid. For this purpose, the taxpayer maintained one of the several existing reserve power plants, which would temporarily produce electricity to ensure that a sufficient voltage level would be maintained in the grid during exceptional disruptions.
The question at issue was whether the power plant tax rate could be applied to the reserve power plant. As the reserve power plant would technically produce electricity during short-term disruptions in nationwide electricity production, the tax authorities and lower courts considered this to be a sufficient reason for applying the power plant tax rate even though the taxpayer did not produce electricity commercially.
The SAC ruled in favour of the taxpayer and held that the general tax rate applied to the reserve power plant. The SAC reasoned that the purpose of the power plant tax rate was to compensate municipalities and allow them to tax commercially operated power plants at a different tax rate. As nothing indicated that the exception to the general rule should extend beyond that, the SAC ruled that the concept of a power plant should be interpreted narrowly. The SAC concluded that the reserve power plant should not be considered a power plant for real estate tax purposes, when also taking into consideration the taxpayer’s operations and duties as the transmission system operator and the fact that the reserve power plant produced electricity non-commercially only during short-term disruptions in nationwide electricity production.
Firstly, the precedent confirms that the special tax rate regime should be interpreted narrowly as exceptions to the general real estate tax rate and in light of the legislative purposes of these rules. Secondly, it confirms the importance of the actual purpose and use of the real estate in determining the applicable tax rates. Thirdly, the precedent shows that not all power plants are necessarily subject to the power plant tax rate and that different kinds of power plants used e.g. for internal or non-commercial purposes may be subject to the general real estate tax rate depending on the circumstances at hand.
Borenius’ lawyers are available to assist in addressing any questions you may have regarding this precedent.