Article 9 December 2022

Krogerus Energy's regulatory update: Implementation of the EU revenue cap in Finland in the form of a windfall tax

The EU revenue cap which limits certain electricity generators' revenues has raised many questions within the energy sector. In Finland, the revenue cap will likely be implemented in the form of a temporary windfall tax which would apply to profits made in 2023. Our energy team's associate Nelli Rönkkö has summarised the key points regarding the implementation of the EU revenue cap in Finland.

Since it broke the news in September that the market revenues for electricity generators using inframarginal technologies, such as wind, solar and nuclear energy, will be limited to EUR 180/MWh in the EU, there have been many questions in the air regarding the implementation of the revenue cap in the member states, including Finland. The revenue cap is based on the EU regulation (2022/1854, adopted on 6 October 2022) which aims to address the current high energy prices. According to the regulation, the revenue cap is in force between 1 December 2022 and 30 June 2023.

Even though EU regulations are directly applicable, adopting the revenue cap requires national implementation. The regulation also allows certain discretion in respect of the application of the revenue cap. In late November, it was reported in the news that the Ministry of Finance is preparing a temporary national windfall tax which is not directly based on the revenue cap model set out in the EU regulation. Earlier this autumn, the Finnish Government had already indicated about their plans to prepare a national windfall tax.

The windfall tax would allow 5% return on equity

A draft of the government proposal regarding the Finnish windfall tax was published on Friday 2 December. The draft also includes a proposal for a similar tax for fossil fuel companies which would implement the solidarity contribution under the EU regulation.

The proposed windfall tax would apply to companies operating in the electricity market which produce or sell electricity (for end-use or resale) if:

1) at least 10% of the company's revenue comes from production or sale of electricity (so-called electricity business operations which, for clarity, does not include distribution of electricity); or

2) the revenue from its electricity business operations is at least EUR 500,000.

According to the draft proposal, the tax would be 33% of the annual net profits from electricity business operations that exceed 5% return on equity. In other words, the taxable profits consist of the profits that exceed 5% of the equity in the electricity business operations' (differentiated) balance sheet. No losses from previous years would be taken into account when calculating the windfall tax. The windfall tax would be paid in addition to the corporate income tax of 20% (if applied).

The proposal is currently circulated for comment

The proposal was circulated for comment on Friday 2 December 2022 and the consultation period ends on 12 December. It is estimated that the proposal will be presented to the Parliament during the week of 26 December. According to the draft proposal, the law would enter into force as soon as possible and it would generally apply to the taxation of the tax year 2023, whereas based on the EU regulation the revenue cap is in force between 1 December 2022 and 30 June 2023. The tax would be levied afterwards during 2024.

We will keep following the topic and provide an update as the implementation of the revenue cap in Finland progresses. In case you would like to discuss the effects of the proposed windfall tax, please do not hesitate to contact our windfall tax specialist, partner Antti Lehtimaja.

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