As a result of the negative effects of the war in Ukraine, the prices of gas, electricity and petroleum products have increased enormously, which in turn increases the prices of other products from the manufacturing and processing industries, and interest rates have risen.

In order to address the capping of prices of the above commodities, the Council of the European Union issued a proposal for a Council Regulation on emergency adjustment of high energy prices, which sets out the method of capping energy prices at the level of the European Union and the method of redistributing taxes on excessive profits among the Member States on the basis of the principle of solidarity, depending on the threat of high energy prices to the economies of the Member States.   

In order to mitigate or address the negative impact of the increased prices of the aforementioned commodities, the Czech Finance Ministry is preparing an amendment to Act No. 586/1992 Coll., on Income Taxes, as amended, which will probably introduce a new additional corporate income tax applied in the years 2023 – 2025 to their standard 19 % tax liability, the basic features of which were presented by the MFČR on 6 October 2022.

The new tax will apply to companies with significant activity in sectors, where windfall profits are generated, i.e. electricity and gas production and trading, banking, fossil fuel extraction and the production and distribution of petroleum and coke products. 

In the banking sector, according to the MFČR, the windfall profits tax will fall on companies with net interest income above CZK 6 billion for the previous year, which, according to the definition of CNB, is the threshold that generally separates large and medium or small banks. It is not yet clear, if this new tax will apply to banks only or to other companies (on their own or as part of bank holding companies) providing financial intermediation.

In the area of energy production and distribution, entire holdings will be assessed, if their total turnover from the activity in question is more than CZK 2 billion per year. 

The basis for calculating the 60 % windfall profits tax will probably be the positive difference between the tax base achieved by these taxpayers in the years 2023 to 2025 and the average of the tax bases of these taxpayers achieved in the years 2018 to 2021 increased by 20 % representing the standard, i.e. expected increase in profits of these companies for the years 2018 to 2021.

Author: Jaroslav Foltýn