Krogerus Tax' regulatory update: The Government's proposal for the temporary Windfall Tax Act
The Finnish Government has published a proposal for the temporary Windfall Tax Act in Finland, the draft of which was briefly discussed in our previous article on the subject. The proposed temporary windfall tax would be applicable to so-called windfall profits gained during tax year 2023 by companies operating in the electricity or the fossil fuel sector. The aim of the proposal is to tax said sectors' increased profits resulting from the current energy crisis. The tax revenues may be allocated to alleviate the negative impacts of high energy prices. Moreover, the proposal has also a legal basis on the EU regulation 2022/1854 on an emergency intervention to address high energy prices.
In the electricity sector, the tax base would comprise the net profits of electricity business operations exceeding 10% of the equity in the electricity business operations' differentiated balance sheet of year end 2022. Therefore, a 10% return on equity would be tax-exempt whereas the amount of profit exceeding said threshold would be taxed at the rate of 30%.
As a rule, the amount of taxable profit would be calculated in accordance with the provisions of the Business Income Tax Act. Notwithstanding, the interest limitation rules set out in said Act would not be applicable, meaning that all at arm's length interest expenses would be fully deductible in calculating the amount of taxable income. Further, although group contributions and losses carried forward from previous years would not be taken into account in determining the amount of the taxable income, Finnish group companies would be allowed to balance the losses incurred from electricity business operations in 2023.
The proposed windfall tax' scope of application is intended to be wide. The companies subject to the windfall tax would entail companies that produce or sell electricity in the Finnish electricity market. Minor generation or sale of electricity would not, however, be subject to the windfall tax. Further, retailers of electricity would not be subject to the windfall tax if the retailer does not belong to a group that produces electricity, or the retailer is not a shareholder in a mutual company producing electricity.
Additionally, companies operating primarily in the fossil fuel sector in Finland would be subject to a windfall tax at the rate of 33%. The tax base would comprise the profit of a company's business operations in 2023 to the extent that the profit exceeds 120% of the company's average profit in 2018–2021. Therefore, the amount of profit that is less than said threshold would be exempted from the windfall tax.
The windfall tax for the electricity and the fossil fuel sectors would be payable in addition to the general corporate income tax of 20% and it would not be deductible for the purposes of said tax. Therefore, the total marginal income tax rate would increase to 50/53% for companies liable to the windfall tax.
The proposal is currently being considered by the Finnish Parliament and we estimate that it will be passed into law relatively shortly. In case you would like to discuss the effects and possible mitigation measures of the proposed windfall tax, please do not hesitate to contact our windfall tax specialist, Partner Antti Lehtimaja.