Executive summary

On 30 September 2022, the European Union (EU) Energy Ministers reached a provisional agreement on 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:

• A revenue cap to a maximum of €180 per MWh on low-cost electricity generating companies (i.e., those whose production costs are unrelated to high fossil fuel prices, such as wind, solar and nuclear producers) from 1 December 2022 to 30 June 2023.
• An EU-wide temporary “solidarity contribution” (effectively a windfall tax) which will be levied at a rate of at least 33% over the profits of companies in the crude petroleum, natural gas, coal and refinery sector which can be applied by EU Member States to fiscal years 2022 and/or 2023. This agreement follows an earlier discussion that the EU Energy Ministers held on 9 September 2022¹ and a European Commission (Commission) proposal published on 14 September 2022.²

Following the agreement, the Regulation will be formally adopted by Member States by written procedure, possibly before the informal European Council meeting on 7 October 2022 where EU leaders are also expected to address the energy crisis. It will then enter into force on the day following its publication in the Official Journal of the EU.

Detailed discussion

Background

The wholesale price of electricity within the EU has reached sustained and unprecedentedly high levels, causing significant increases in consumer energy bills. The EU Energy Ministers held a discussion on this topic on 9 September 2022 in an extraordinary Council meeting where they agreed on a common direction for temporary emergency measures and invited the Commission to come forward with legislative proposals by mid-September.³

On 14 September 2022, the Commission proposed a Regulation including measures to address the energy situation in the EU.⁴ Also, on the same date, 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.

Provisional agreement on the Regulation

On 30 September 2022, the EU Energy Ministers held another extraordinary Council meeting where they provisionally agreed on the Regulation introducing emergency measures to mitigate high energy prices and the risk of supply shortages in Europe. The agreed Regulation includes two tax-related measures summarized below.

Revenue cap on inframarginal electricity producers

The first measure is a revenue cap to a maximum of €180 per MWh on low-cost electricity generating companies (i.e., those whose production costs are unrelated to high fossil fuel prices, such as wind, solar and nuclear producers). EU 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 cap and the price that these generators actually charge their customers would generate extra financial revenues for Member States, with the idea that these revenues should be used to support households and businesses in need. According to the Regulation, the Commission shall provide guidance to Member States regarding the implementation of this measure.

The differences/clarifications that were introduced in the agreed Regulation compared to the initial proposal by the Commission include:

• The revenue capping becomes applicable from 1 December 2022 to 30 June 2023 (in the initial Commission proposal this was 31 March 2023).
• Member States have the option of allowing the market cap to apply to only 90% of the revenues exceeding the cap.
• There is an obligation for Member States to put in place effective measures to ensure that the cap is effectively applied in group situations.

A temporary solidarity contribution over the profits of companies in the crude petroleum, natural gas, coal, and refinery sectors

The second measure is a mandatory temporary solidarity contribution (effectively a windfall tax) of at least 33% on the surplus profits of EU businesses or permanent establishments that generate at least 75% of their turnover in the extraction, mining, refining of petroleum or manufacture of coke oven products.

For the purpose of determining the “surplus profits” subject to the temporary solidarity contribution, EU Member States will use the taxable profits, as determined under national corporate income tax rules, of in-scope activities in the fiscal year starting in 2022 and/or in 2023, which are in excess of a 20% increase on the average taxable profits of the four fiscal years starting on or after 1 January 2018.

The solidarity contribution will apply in addition to regular domestic taxes and levies. Member States can keep enacted national measures that are equivalent to the solidarity contribution and not introduce the latter provided such national measures are compatible with the objectives of the Regulation and generate at least comparable proceeds.

Again the idea is that Member State revenues from this contribution would be used to finance reduced energy bills for vulnerable households and (energy-intensive) businesses, and support a faster move to green energy. To that end, 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.

The differences/clarifications that were introduced in the agreed Regulation compared to the initial proposal by the Commission include:

• A clarification that undertakings in scope are those in the crude petroleum, natural gas, coal and refinery sectors.
• Member States should apply the solidarity contribution to fiscal years 2022 and/or 2023 (the initial Commission proposal referred only to fiscal year 2022).
• The look-back period used to set the baseline “average taxable profits” has been extended from three years to four years (the first look-back year is now 2018).
• Member States should ensure consistent application of the solidarity contribution in the case of shortened fiscal years for companies established in 2022 or 2023, and in the case of business restructurings or mergers.

Next steps

The measures were politically agreed under the provisions of Article 122 of the Treaty on the Functioning of the European Union (TFEU) (emergency and solidarity) through which merely a qualified majority vote in the Council is required for adoption. Some Member States had expressed concerns regarding the legal basis as normally EU tax legislation can only be adopted by a unanimous decision of the 27 EU Member States. To address this concern, some Member States have proposed to develop a formal Council statement confirming that adoption under Article 122 TFEU will not set a precedent for adoption of EU tax legislation under qualified majority voting. However, such a statement was not published together with the provisional agreement and it is unclear if it will be published in the future.

Following this agreement, the Regulation will be formally adopted by EU Member States by written procedure, possibly before the informal European Council meeting on 7 October 2022 where EU leaders are also expected to address the energy crisis. It will then enter into force on the day following its publication in the Official Journal of the EU.

Implications

Businesses potentially in scope should assess the potential tax implications of the Regulation. For the solidarity contribution specifically it seems that Member States are to be given some leeway in implementation: for example, it appears that they may choose to apply the contribution either for the 2022 or 2023 fiscal year, or to both. This means that it is important also to monitor the responses of the various Member States to assess the impact of implementation in different jurisdictions within the EU.

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 across sectors to monitor these developments.

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For additional information with respect to this Alert, please contact the following:

EY Société d’Avocats, Paris

Jean-Pierre Lieb | jean.pierre.lieb@ey-avocats.com

Ernst & Young Belastingadviseurs LLP, Rotterdam

Marlies de Ruiter | marlies.de.ruiter@nl.ey.com

Maikel Evers | maikel.evers@nl.ey.com

Ernst & Young Belastingadviseurs LLP, Amsterdam

Konstantina Tsilimigka | konstantina.tsilimigka@nl.ey.com

Max Velthoven | max.velthoven@nl.ey.com

Ernst & Young LLP (United Kingdom), London

Ben Regan | bregan@uk.ey.com

Ernst & Young LLP (United States), Global Tax Desk Network, New York

Jose A. (Jano) Bustos | joseantonio.bustos@ey.com

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Endnotes

See EY Global Tax Alert, EU considers electricity revenue cap and windfall tax as part of emergency package, dated 13 September 2022.

See EY Global Tax Alert, European Commission proposes Regulation introducing electricity revenue cap and solidarity contribution of fossil sector, dated 15 September 2022.

See EY Global Tax Alert, EU considers electricity revenue cap and windfall tax as part of emergency package, dated 13 September 2022.

See EY Global Tax Alert, European Commission proposes Regulation introducing electricity revenue cap and solidarity contribution of fossil sector, dated 15 September 2022.