Legal Alerts/14 Mar 2023
UPDATE: New Act on the Profit Tax on Electricity to Enter into Force in March 2023
We have discussed the Finnish Government’s draft and final proposals for profit tax on electricity in our earlier Legal Alerts (available here and here). On 27 February 2023, the Finnish Parliament adopted the proposed legislation with some amendments and additions proposed by the Parliament’s Finance Committee. The legislation is expected to enter into force in March 2023.
Background and scope
The new legislation is intended to implement EU Council Regulation (EU) 2022/1854, although the Finnish profit tax is not based on the market revenue cap mechanism provided for in the regulation. The profit tax is merely an excess profit tax paid on top of the business income tax.
The profit tax on electricity targets corporate, partnership and individual electricity producers and suppliers that are active on the electricity market and carry on an electricity production or supply business, i.e. the electricity business. However, the taxpayer’s other business operations are excluded from its electricity business if the taxpayer’s annual revenues from such other business operations amount to at least EUR 500,000 or account for at least 10% of the annual total revenues of the taxpayer.
Some entities are exempted from the profit tax. Namely, entities whose total revenues derived from the electricity business are less than EUR 500,000 are exempted. In addition, retailers that do not produce electricity or do not belong to a group of companies that produces electricity are exempted from the profit tax, provided however that the retailer or its group companies do not directly or indirectly own shares in Finnish electricity producing entities that supply electricity to their shareholders at cost price (so-called Mankala companies).
Determination of profit tax
The profit tax will be levied on excess profits derived from the electricity business during the tax year 2023. In few special cases this may also apply to the tax year 2024. The excess profits are the taxable profits generated by the electricity business less a 10% tax-exempt annual return on equity. The excess profits are subject to a 30% profit tax. The profit tax will be assessed and payable in 2024. The profit tax and it is non-deductible for income tax purposes.
The taxable profit received from the electricity business is generally calculated in accordance with the same rules as taxable business profits for income tax purposes. The most important exceptions for profit tax purposes are the following:
- Interest expenses are not subject to interest deduction limitations.
- The profits and losses attributable to foreign permanent establishments are exempted from the profit tax.
- The profits attributable to the net consumption of electricity in the taxpayer’s and the qualified group companies’ other business operations, i.e. internal electricity business, are exempted from the profit tax.
- No tax loss carryforward or group contributions are available. A limited number of qualified Finnish group companies involved in an electricity business may in certain conditions offset losses against taxable profits.
The equity attributable to the taxpayer’s electricity business is the amount of equity recorded in its differentiated balance sheet of the electricity business for the preceding tax year less any equity attributable to foreign permanent establishments and internal electricity business. Any increases and decreases in the taxpayer’s equity during the tax year are disregarded when determining the excess profit.
In addition, the shareholders of Mankala companies may opt for a special tax treatment. The shareholders may adjust the equity by adding to it the difference between the acquisition costs of the shares and the sum of restricted and invested equity attributable to the shares. However, in that case the interest expenses attributable to the shares are non-deductible.
Relevance and impacts
As the profit tax cuts down excess profits, the impact of the profit tax depends on the profitability and the return on equity of the taxpayers’ electricity business. The profit tax will have a greater impact on the taxpayers whose internal electricity business is rather insignificant. The internal electricity business exemption is relevant to such taxpayers that belong to Finnish industrial groups with significant net consumption of electricity. Currently, it seems that the profit tax’s impacts on new investments for example in renewables will not be excessively negative given that the profit tax will be temporary, and it should not target any future profits. However, as the development of the energy crisis remains uncertain, the future needs for extraordinary measures might entail extensions to the adopted measures in the future.
The special tax treatment intended for shareholders that purchase electricity from Mankala companies at cost price mostly concerns shareholders that have significant external electricity business in addition to their internal electricity business. The benefits of opting for the special tax treatment depend on the profit level and the asset and capital structure of the taxpayer’s electricity business. In general terms, the value of the investment in relation to the total assets determine the magnitude of how much equity and non-deductible interest expenses attributable to the electricity business is attributed to the investment for profit tax purposes. In addition to the magnitude, the higher the amount of accumulated profits and the lower the interest rate of non-deductible interest expenses is in relation to the 10% tax-exempt return on equity, the more such shareholders are likely to be able to benefit from the special tax treatment.
The legislation has been prepared within a rather short time frame. The legislative preparations have mainly focused on the impact that the profit tax will have on the ordinary course of business without having any greater regard to the impact of the tax on nonrecurring transactions. The legislation might entail unpredictable tax consequences with respect to investments, acquisitions, and intragroup reorganisations. This stresses the need for a careful analysis of the profit tax’s potential impacts on significant out-of-ordinary transactions and dealings in order to mitigate avoidable tax exposures.
If you have any questions about the profit tax and what it could mean for your business, please contact the Borenius Tax team or your regular Borenius contact.