September 15, 2022
European Commission proposes Regulation introducing electricity revenue cap and solidarity contribution of fossil sector
On 14 September 2022, the Commission proposed a new Regulation introducing emergency measures to mitigate high energy prices and the risk of supply shortages in Europe (the Regulation). The Regulation includes among others two tax-related measures, targeting companies in the energy sector that the EU considers have benefited disproportionately from the current high energy prices. These measures are:
This proposal follows a discussion that the EU Energy Ministers held on 9 September 2022 in an extraordinary Council meeting.1 During the meeting, Member States agreed on a common direction for temporary emergency measures and had invited the Commission to come forward with legislative proposals by mid-September. Another extraordinary Council meeting is scheduled for 30 September 2022.
Also, on 14 September, Commission President Ursula von der Leyen delivered the annual State of the Union speech to the European Parliament. During her speech, President von der Leyen referred to the current energy crisis in Europe and highlighted the need for solidarity.
On 14 September 2022, the Commission proposed a Regulation including measures to address the energy situation in the EU. The background is that the wholesale price of electricity within the EU has reached sustained and unprecedentedly high levels, causing significant increases in consumer energy bills. The Commission was mandated to come up with proposals by the EU Member States following an extraordinary Council meeting that took place on 9 September 2022.
The Regulation includes, among others, two tax-related measures:
Revenue cap to a maximum of €180 per MWh on inframarginal electricity producers
For inframarginal electricity producers, an EU-wide measure would temporarily apply to limit the revenues that electricity generators could earn from producing electricity from sources that are cheaper than current price-setting technologies to a maximum of €180 per MWh of electricity produced. The rationale is that some inframarginal producers are currently enjoying a high level of profit due to favorable external market factors (in particular the impact of the war in Ukraine on Russian gas supplies) and unrelated to the companies' own efforts or investments. The revenue cap seeks to mimic the market outcome that these producers could have expected if the gas supply disruptions caused by the invasion of Ukraine had not taken place.
Member States can decide whether to apply the cap on revenues at the settlement of the exchange of energy or thereafter. Any difference or excess revenue above the revenue cap would be paid to the Government, while leaving wholesale energy prices unchanged. Affecting, for example, solar, wind and nuclear energy producers, the difference between the price that these generators actually charge their customers and the cap would generate extra financial revenues for Member States, with the idea that these revenues should be used to support households and businesses in need.
A temporary solidarity contribution of at least 33% of "surplus profits" which would be levied over the profits of companies in the oil, gas, and coal sectors
Surplus profits generated from activities in the oil, gas, coal and refinery sector (which is defined in the proposed Regulation as any economic activity performed by an EU company or permanent establishment generating at least 75% of turnover in the field of the extraction, mining, refining of petroleum or manufacture of coke oven products) will be subject to a temporary solidarity contribution at a rate of at least 33%.
For the purpose of determining the "surplus profits" subject to the temporary solidarity contribution, Member States will use the taxable profits, as determined under national corporate income tax rules, of in-scope activities in the fiscal year starting on or after 1 January 2022, which are in excess of a 20% increase of the average taxable profits of the three fiscal years starting on or after 1 January 2019.
Again, the Commission proposes that Member State revenues from this contribution are used to finance reduced energy bills for vulnerable households and (energy-intensive) businesses, and to support a faster move to green energy. To that end, it is proposed that a share of the revenue could be allocated towards Member States' national plans to implement the "RePowerEU" initiative: this is the EU's plan, announced in May 2022, to reduce reliance on Russian gas and accelerate the transition to renewable energy sources.
Von der Leyen's State of the Union speech highlights need for solidarity
On 14 September 2022, Commission President Ursula von der Leyen delivered the State of the Union speech. This is an annual speech addressed by the President of the Commission to the European Parliament plenary session in September and includes the Commission's main priorities and plans for next year. During her speech, President von der Leyen referred to the current energy crisis in Europe and highlighted the need for solidarity.
She also referred to the Commission's plans to come up with a proposal for a single set of tax rules for doing business in Europe ("Business in Europe: Framework for Income Taxation" or BEFIT). This initiative which was initially announced in the Commission Communication of May 2020,2 seeks to move the EU towards a common set of rules for determining taxable income and provide for a more efficient allocation of taxing rights between Member States.
EU Member States have expressed their intention to swiftly work on the Commission's proposals. The Member States may decide on the proposals during the extraordinary Council meeting of 30 September 2022. The measures are proposed under the provisions of Article 122 of the Treaty on the Functioning of the European Union (emergency and solidarity) through which the unanimity requirement that normally applies to the adoption of direct tax legislation in the EU will not be required; the Commission has announced that the proposal merely requires a qualified majority vote in the Council to be approved.
Once adopted, the Regulation will enter into force on the day following that of its publication in the Official Journal of the EU. It will be directly applicable in the Member States for a period of one year from its entry into force.
Given the urgency that the Ministers and the Commission have given to the matter, the proposed Regulation could be adopted soon. However, most Member States are yet to take a position on the proposals.
Also, it is worth noting that many existing tax policies have been introduced as temporary measures, but end up becoming permanent or at any rate have a longer impact than expected. Businesses potentially in scope should therefore start assessing the potential tax implications of the EU's energy package in light of their current operating structure.
While likely limited to the energy sector for now, the possible introduction of windfall taxes and other emergency levies in the EU could spark a trend that spreads to other industries. It is thus important for businesses in other sectors to monitor these developments.
For additional information with respect to this Alert, please contact the following:
EY Société d'Avocats, Paris
Ernst & Young Belastingadviseurs LLP, Rotterdam
Ernst & Young Belastingadviseurs LLP, Amsterdam
Ernst & Young LLP (United Kingdom), London
Ernst & Young LLP (United States), Global Tax Desk Network, New York
1 See EY Global Tax Alert, EU considers electricity revenue cap and windfall tax as part of emergency package, dated 13 September 2022.
2 See EY Global Tax Alert, European Commission publishes Communication on Business Taxation for the 21st century, dated 18 May 2020.