If adopted the surprise new tax will impose a significant increase on businesses' tax and compliance burdens
The current draft law prepared by the German Federal Ministry of Finance (which has not yet been officially published) is based on the Council Regulation (EU) 2022/1854 dated 6 October 2022 on emergency interventions to address high energy prices and considered to be a temporary solidarity contribution within the meaning of Article 14 of the Regulation. It comes as a certain surprise that German intends to introduce an Energy Windfall Tax as only very recently an expect committee of economists appointed by the German Minister of Finance had advised against levying an Energy Windfall Tax. The draft law is supposed to be implemented as part of the Annual Tax Act 2022 (Jahresteuergesetz), which is likely to be adopted before the end of the year.
- The German Energy Windfall Tax (EWT) would be levied from businesses generating at least 75% of their revenue from with activities in the crude petroleum, natural gas, coal and refinery sectors.
- Tax would be levied, regardless of legal form, from companies, partnerships and German permanent establishments of international businesses. There would be no German tax grouping for purposes of the German EWT.
- Taxable periods would be 2022 and 2023.
- Tax rate would be 33%.
- Subject to certain exceptions, the tax base would be taxable profits (as determined for (corporate) income tax purposes) in 2022 and 2023 if and to the extent these have increased by more than 20% compared to the average taxable profits during 2018 to 2021.
- In line with the Council Regulation, if the average of the taxable profits in those four fiscal years is negative, the average taxable profits would be considered zero for the purpose of calculating the German EWT. Despite not being explicitly required by Council Regulation, the same would apply to newly set-up businesses for which no 2018 to 2021 average is available. In both cases, this would likely mean that the extra 33% in tax would be levied on all of such businesses' profits in 2022 and 2023.
- The German EWT would not be deductible for German (corporate) income tax and trade tax purposes.
- The tax would be handled by the Federal Tax Office (Bundeszentralamt für Steuern) and would be assessed by way of self-assessment.
- Self-assessment tax returns would have to be filed at the latest together with the (corporate) income tax returns of the relevant businesses, and the EWT would become due and payable within 10 days after such self-assessment tax returns will have been filed.
If adopted, the German EWT would result in a significant additional tax burden for affected business for 2022 and 2023 and come with an additional compliance burden. A number of technical details still need to be clarified in particular as the German EWT deviates in many aspects from standard Germany income tax rules: the German EWT would be levied by way of self-assessment, partnerships would not be treated as tax transparent and German tax group rules would not apply. Newly set-up businesses should particularly review how they would be treated for EWT purposes (and potentially consider a legal challenge). This is because despite not being required by EU rules the current draft rules could mean that the extra 33% in tax would be levied on all of their profits in 2022 and 2023.