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Windfall tax proposal published

We keep you informed of developments regarding the possible introduction of a special tax on "windfall" profits - the so-called windfall tax.

On Friday, 21 October 2022, a proposed amendment aimed at introducing the windfall tax was officially published - in the form of an amendment to Parliamentary Document 254.

Below is a simplified summary of our current understanding of its main parameters

Period of application/prepayment

• The new tax would be applied in the years 2023-2025, with advances payable as early as 2023 based on 2022 figures. It is worth noting in this context the counter-proposal of the Pirates to change the time period of application of the windfall tax to 2022-2024.

Companies in scope

• The new tax is to apply to companies with significant activities in the areas of electricity and gas production and trade, banking, fossil fuel extraction and production and distribution of petroleum and coke products.[1]
• The entry criteria should be as follows:
  • for banks - an individual criterion of (domestic[2]) net interest income (for 2021) of at least CZK 6 billion (it is worth noting the counterproposal of the Pirates to reduce this criterion to CZK 2 billion) and, in addition, an individual criterion of (domestic) net interest income in the current year of at least CZK 50 million;
  • for others - the group criterion of (domestic) net turnover from the respective activities (for 2021 and excluding banks) of at least CZK 2 billion and in addition the individual criterion of (domestic) net turnover from the respective activities in the current year of at least CZK 50 million; 
  • additional criterion for mining/treatment of hard coal / extraction of oil and gas / production of coke and refined petroleum products - it is sufficient to meet the individual criterion of (domestic) net turnover from these activities in the current year of at least CZK 50 million if these revenues represent at least 25% of the annual turnover of the taxpayer.

Rate

• The windfall tax rate should be 60% and would be applied to the companies concerned as a kind of surcharge on top of the 19% corporate income tax on their "windfall profits". In this context, it is worth noting the Pirates' counterproposal to reduce the windfall tax rate to 40%.

Tax base

• This windfall profit should be calculated by comparing the current year's tax base[3] with the arithmetic average of the 2018-2021 historical bases increased by 20%.[4]

Next steps

• The ambition, of course, is to get the legislative process done so that everything is approved and promulgated by the end of the year.

We will continue to monitor this area. If you have any questions, please contact the authors of this article or the EY tax team with whom you regularly work.

Authors:

Lucie Říhová

Karel Hronek

Tereza Pospíšilová

Martin Novák

[1] More precisely, these should be activities listed in the NACE classification under the codes:

o    05.10 - Mining and preparation of hard coal,

o    06 - Extraction of crude petroleum and natural gas,

o    19.1 - Manufacture of coke oven products,

o    19.2 - Manufacture of refined petroleum products,

o    35.1 - Production, transmission and distribution of electricity, except combined production of electricity and heat with a ratio of electricity produced to useful heat supplied of less than 4.4,

o    35.2 - Production of gas; distribution of gaseous fuels through networks,

o    46.71.2 - Wholesale of liquid fuels and related products,

o    46.71.3 - Wholesale of gaseous fuels and related products,

o    49.50.1 - Oil transportation by pipeline,

o    49.50.2 - Gas transportation by pipeline,

o    64 - Financial intermediation, except insurance and pension funding, except for the activities listed in the NACE classification under code 64.11 - Central banking, if the taxpayer is a bank.

[2] I.e. for a Czech tax resident, apart from income from sources abroad that can be taxed abroad according to an international treaty, or for a non-tax resident, income from sources in the Czech Republic apart from income that cannot be taxed in the Czech Republic according to an international treaty. The bill also contains an exception from inclusion in the relevant income for selected intra-group supplies of electricity or gas.

[3] Before the application of reducing/deductible items and without the inclusion of income from foreign sources that may be taxed abroad under an international treaty (and related expenses). Similarly, this applies to historical tax bases.

[4] Under certain conditions, it will be possible to transfer historical average basis amounts between companies in the group.