Government proposes additional profit tax for electricity companies and companies in the fossil fuel sector
The Finnish Government has put forward a Bill to impose an additional 30 percent profit tax on electricity companies and an additional 33 percent profit tax on companies in the fossil fuel sector. The profit tax is intended to be non-current, i.e., it will only cover profits generated during the 2023 tax year. The Bill is currently being considered in the Finnish Parliament as an urgent matter.
The Bill is based on the Regulation of the European Council on emergency intervention to address high energy prices (EU 2022/1854) and the Finnish Government’s budget negotiations in autumn 2022. The Bill aims to address the significantly high returns generated by exceptionally high prices for certain companies in the energy market, which do not result from the companies’ own additional contributions or investments, and to redistribute those returns to consumers suffering from high energy prices.
Enterprises subject to tax
The additional profit tax would be applicable to enterprises producing and/or selling electricity and enterprises in the fossil fuel sector. In addition to Finnish companies, the tax would be applied to Finnish permanent establishments of foreign companies.
However, companies that are engaged in minor electricity business would be outside the scope of the new legislation. A company engaged in minor electricity business is a company whose electricity business turnover is less than EUR 500,000 per year or whose electricity business comprises less than 10 percent of its total turnover.
The additional profit tax would not be applied to distribution system operators or transmission system operators, nor to the production or sale of thermal energy in the co-production of electricity and heat. The proposed tax would also not apply to the foreign permanent establishment of a Finnish company.
The additional tax would not apply to companies engaged solely in the electricity retail business. However, electricity retail companies that have their own electricity production or own shares in Mankala-companies or belong to a groups that have their own electricity production or own shares in Mankala-companies would be subject to the additional profit tax.
Companies in the fossil fuel sector would be subject to the additional profit tax if more than 75 percent of their turnover is generated from the production of crude petroleum or natural gas, the production of refined products from crude petroleum, or the production of coal products. The production of biofuels would not be subject to the additional profit tax.
Calculation of the taxable profit
The additional profit tax would be paid in addition to the standard corporate income tax of 20%. It is proposed that the calculation of taxable profit be based on the Finnish Business Income Tax Act, i.e., the yearly depreciations and other accrual rules concerning electricity business would follow the rules applicable to corporate income taxation. The additional profit tax would not be deductible in income taxation.
For companies in the electricity sector, the taxable base would be the electricity business’ net profit, which exceeds a ten percent annual return on the amount of shareholder’s equity recorded in the electricity business’ pro forma balance sheet relating to the previous year. It should, however, be noted that electricity used within the group would not be subject to the additional profit tax and would not be included in the relevant shareholder’s equity.
Companies are already obliged to unbundle their electricity business from their other business and transmission business in accordance with the Electricity Markets Act, and to prepare and publish a separate balance sheet and income statement for the electricity business. The principles applicable to the unbundling are defined in the Electricity Markets Act and the relevant decree of the Ministry of Economic Affairs and Employment. According to the Bill, these unbundled accounts would be used as a basis for the additional profit tax.
According to the Electricity Markets Act, the selected unbundling procedure should be followed from year to year unless there is a justifiable reason to change the procedure. Any changes have to be clarified in the electricity business’ annual accounts. Consequently, companies are advised to review the unbundling procedures they currently use, and to plan potential changes carefully. The review should be performed urgently since the 10% threshold is calculated based on the shareholder’s equity on the FY 2022 electricity business’ balance sheet.
Tax losses from previous tax years would not be considered when calculating the tax base. However, interest expenses would be fully deductible, i.e., the Finnish restrictions concerning the deductibility of interest expenses should not be applicable. Group companies are also allowed to spread taxable profits and losses of the electricity business within the group, even though the use of direct group contributions is not permitted.
Fossil fuel business
In the case of companies in the fossil fuel sector, the taxable base would be the result which exceeds 120 percent of the average annual business income deriving from the 2018—2021 tax years. If the company has not conducted any business activity in those years or the yearly average is negative, the comparable amount for the tax base is set at zero.
According to the Bill, the taxpayer should submit a separate tax return for the tax assessment of the additional profit tax and the Tax Administration would impose the taxes to be paid by the taxpayer. The separate tax return would be submitted during spring 2024, and the tax would be imposed and charged afterwards during 2024. The exact times would be determined later by the Tax Administration.
The proposal affects the 2023 tax year
The additional profit tax would reduce the FY 2023 net profits of the companies that are covered by the new legislation. The proposed profit tax would especially hit companies conducting electricity business whose level of external debt on the FY 2022 balance sheet is high because the threshold is calculated on the basis of the FY 2022 shareholder’s equity committed to the electricity business.
According to the Bill, it is thought that the tax will not have a significant impact on electricity production investments, because the ten percent return calculated on the electricity business’ equity would be tax-exempt and the tax would only apply to the 2023 tax year. The tax revenues from the electricity sector to the Finnish state are estimated to be around EUR 0.5-1.3 billion, whereas tax revenues from profit tax in the fossil fuel sector are estimated to be low.
The Bill is currently being considered by the Finnish Parliament and the proposed new Act and the amendment to the Business Income Tax Act are intended to come into effect as soon as possible. As the method of calculating the taxable profit may be controversial and the exact content of the reporting liabilities is still unclear, Roschier is closely monitoring the process and we would be happy to discuss the effects of the new legislation on your business and tax position in Finland.