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EU Regulation for Cap on Market Revenues and Windfall Profits Tax Published for Energy Sector — Orbitax Tax News & Alerts

Council Regulation (EU) 2022/1854 on an emergency intervention to address high energy prices was published in the Official Journal of the EU on 7 October 2022, following its final approval on 6 October. As previously reported, the main aim of the Regulation is to collect and redistribute the energy sector's surplus revenues to final consumers through a cap on market revenues for so-called inframarginals, and an excess profit tax for the fossil fuel sector.

Cap on Market Revenues for Inframarginals

The Regulation caps the market revenues at EUR 180/MWh for electricity generators, including intermediaries, that use inframarginal technologies such as renewables, nuclear and lignite, to produce electricity. The measure does not apply to technologies that directly compete with gas-fired power plants to offer flexibility to the market, nor to technologies using substitutes to natural gas, such as bio-methane, as input fuels.

Each Member State shall use the measure(s) of its choice to collect and redirect any excess revenues above the market cap towards supporting final consumers. In addition to specific exemptions for Cyprus and Malta, the proposal provides for various options that can be elected by Member States depending on their national circumstances and the measures they already adopted at a national level. These include the possibility to:

  • Set up a higher or lower market revenue cap or differentiate between electricity generation technologies, subject to the conditions detailed in the Regulation; and
  • Expand the measure to other market actors such as traders.

Where a Member State's net import dependence is 100% or more, that Member State is required to conclude an agreement by 1 December 2022 to share the surplus adequately with the exporting Member State. The cap is to remain in place from 1 December 2022 until 30 June 2023.

Windfall Profits Tax for Fossil Fuel Sector

The Regulation provides for a mandatory temporary windfall profit tax (officially termed "temporary solidarity contribution") on the excess profits of fossil fuel companies for the tax years starting in 2022 and/or 2023. For these purposes, fossil sector companies are companies resident (or branches established) in an EU Member State generating at least 75% of their turnover from economic activities in the field of the extraction, mining, refining of petroleum or manufacture of coke oven products. The tax would be due at a minimum rate of 33% on "surplus profits" as determined under the applicable national regulations. "Surplus profits" are defined as profits accrued from activities carried out at the level of EU companies and permanent establishments in the above fossil fuel fields, to the extent they exceed the average of the taxable profits in the four fiscal years starting on or after 1 January 2018, as increased by 20%. If the average of taxable profits in those four years is negative, then the average of taxable profits for the purposes of calculating the taxable base of the contribution shall be set at zero. Member States such as Estonia which tax profits only upon their distribution are nevertheless required to apply the windfall profits tax irrespective of actual distribution.

Member States can keep national measures that are equivalent to the solidarity contribution provided they are compatible with the objectives of the Regulation and generate at least comparable proceeds.

Proceeds from the solidarity contribution shall be used to provide financial support to households and companies and to mitigate the effects of high retail electricity prices.