Following in the footsteps of Council Regulation (EU) 2022/1854 regarding emergency measures to reduce energy prices, the Finnish Government has published a draft proposal concerning profit taxes. The proposal aims to tax the profits that electricity companies, fossil fuel refineries, and fossil fuel production companies earn from the sale of electricity and fossil fuels during the energy crisis.
The measures introduced in Council Regulation (EU) 2022/1854
The Council of the European Union adopted Council Regulation (EU) 2022/1854 in October 2022. The Regulation introduces three emergency measures that seek to reduce energy prices. The measures are as follows:
- Reduction of electricity consumption
- Mandatory cap of EUR 180 per MWh on market revenues for electricity produced from defined sources
- Solidarity contributions charged from businesses in the crude petroleum, natural gas, coal, and refinery sectors
The Finnish draft proposal on profit taxes
The proposed legislation on profit taxes targets electricity suppliers as well as the producers and refiners of fossil fuels. The proposed profit taxes would be paid in addition to the regular income tax, and they would not be deductible in income taxation.
The purpose of the profit taxes is to tax the surplus profits resulting from the on-going energy crisis. The aim of the proposal is to achieve some of the goals set out in the new Regulation, but the proposed profit taxes do not follow the exact measures introduced in the Regulation.
The proposed act is intended to enter into force on 1 January 2023, and the profit taxes would be levied only for the tax year 2023. Opinions on the draft proposal are accepted until 12 December, and the proposal is expected to be submitted to the Parliament at the end of December.
Profit tax on electricity
The proposal does not include a market cap on revenues generated by the sale of electricity as the Regulation does, but it does aim to tax the profits generated by the electricity business. Companies producing and/or selling electricity fall within the scope of the new proposed act if the company’s electricity business revenue amounts, in total, to at least EUR 500,000 or accounts for at least 10% of the total revenue of the company.
The new profit tax for companies in the electricity sector is proposed to be 33% of these companies’ electricity business revenue that exceeds an annual return of 5% on the shareholders’ equity recorded in the differentiated balance sheet of the electricity business. The profit tax will be levied on all electricity regardless of how it is produced.
The proposal includes a tax relief that applies to profits generated by a company’s internal electricity business. This relief is aimed at companies that consume electricity in their other business activities in addition to producing and supplying it.
Profit tax on fossil fuels
Companies that generate at least 75% of their turnover through the production and refinery of crude and refined petroleum, natural gas, and coal are also within the scope of the new proposed legislation. The levied profit tax will be 33% of the profits exceeding an annual return of 5% on the equity recorded in the relevant company’s balance sheet.
Contrary to the solidarity contribution established in the Regulation, the formula for calculating the amount of profit tax that will be levied from the producers and refiners of fossil fuels does not include a comparison to the profits generated in the preceding four years.
Remarks on the draft proposal
The draft proposal has been prepared within a short timeframe, and the proposed model for profit taxes would seem to result in a relatively heavy tax burden. The draft proposal has been criticised for taxing both regular profits and surplus profits as only a 5% return on equity is excluded from the tax base.
Considering the tight schedule and the Parliament’s heavy end-of-year workload, it is uncertain as to whether the proposed act will enter into force as planned.
If you have any questions about the draft proposal and what it could mean for your business, please contact the Borenius Tax team or your regular Borenius contact.