Windfall tax

The new tax is meant to apply to selected taxpayers in the fossil fuel sector, in the energy sector and banks that are benefiting extraordinarily, and are expected to continue to benefit from the current enormous increase in gas, electricity and petroleum prices and, in the case of banks, from the rise in interest rates.

Below we present the most important parameters of the new tax, with an emphasis on the conditions under which a corporation becomes a taxpayer of this tax.

1) Taxpayers that are not banks, coking plants, or gas, oil or coal miners

These are legal entities that are not banks and are not coking plants, or gas, oil or coal miners under Section 17c (2) of the Income Tax Act; and

1. that, in the tax year or period for which the tax return is submitted, which at least partly falls within the calendar years 2023-2025, generate “relevant income” for the windfall tax of at least CZK 50 million;
2. and which

2.1.    are part of an group of enterprises with unexpected profits during the period of application of the windfall tax; or

2.2.    they generated relevant windfall tax income of at least CZK 2 billion for the first accounting period that ended on or after 1 January 2021.

A group of enterprises with unexpected profits is a group of enterprises pursuant to the act governing international cooperation in tax administration excluding banks, which have, in the first accounting period ending on or after 1 January 2021, an aggregate income for windfall profits tax of at least CZK 2 billion.. In case of uncertainty, the taxpayer may request a binding assessment from the tax authorities, whether it is part of a group of companies with unexpected profits along with another corporate income tax payer.

The relevant income for this group of taxpayers is considered to be domestic income from activities listed in the NACE classification under the codes::

• 35.1 – Electric power generation, transmission and distribution with the exception of the cogeneration of electricity and heat in the ratio of electricity produced and the supply of useful heat of less than 4.4;
• 35.2 – Manufacture of gas; distribution of gaseous fuels through mains;
• 46.71.2 – Wholesale of liquid fuels and related products;
• 46.71.3 – Wholesale of gaseous fuels and related products;
• 49.50.1 – Transport of oil by pipeline;
• 49.50.2 – Transport of gas by pipeline.

If the taxpayer carries out these activities, they should be entered in the CSO's register of economic entities.

An exception for this group of income is comprised of domestic income from activities listed in the NACE classification under the following codes:

• 35.1 – Electric power generation, transmission and distribution with the exception of the cogeneration of electricity and heat in the ratio of electricity produced and the supply of useful heat of less than 4.4;
• 35.2 – Manufacture of gas; distribution of gaseous fuels through mains;

if the taxpayer has supplied electricity or gas to another taxpayer which is part of the same group of enterprises for its own consumption.

According to the explanatory memorandum to the amendment to the Act, own consumption means a situation where this other taxpayer from the same group of enterprises does not re-sell the electricity or gas but uses it as a material input for its own consumption. Thus, intra-group supplies of electricity and gasshould be excluded from the scope of the windfall tax.

2) Coking plants, or gas, oil or coal miners pursuant to Section 17c (2) of the income Tax Act

These legal entities shall become payers of the windfall tax if:

1. in the tax period or period for which a tax return is submitted, which at least partly falls within the calendar years 2023 – 2025, their selected relevant income for the windfall tax amounts to at least CZK 50 million and
2. the selected relevant income for the windfall tax accounted for at least 25% of their annual aggregate net turnover under the Accounting Act for the first accounting period ended on or after 1 January 2021.

The selected relevant income for these taxpayers is the domestic income from the activities listed in the NACE classification under the following codes:

• 05.10 – Mining and treatment of hard coal;
• 06 – Extraction of crude petroleum and natural gas;
• 19.1 – Manufacture of coke oven products;
• 19.2 – Manufacture of refined petroleum products.

If the value of the selected relevant income for these legal entities does not exceed the above-mentioned limits, they still may become payers of the windfall tax pursuant to Point 1 above.

3) Banks

A bank becomes a payer of the windfall tax if:

1. in the tax period or period for which a tax return is submitted, which at least partly falls within the calendar years 2023 – 2025, the relevant income for the windfall tax amounts to at least CZK 50 million; and
2. it had relevant income for the windfall tax of at least CZK 6 billion for the first accounting period that ended on or after 1 January 2021.

The relevant income is domestic income from activities under NACE code 64 – Financial service activities, except insurance and pension funding, with the exception of activities under NACE code 64.11 – Central banking.

Relevant income

The amount of the relevant income for the purposes of the windfall tax shall be determined for banks as the annual net interest income and for other taxpayers as the annual aggregate net turnover from the relevant activities.

Windfall tax base

It should be noted that the windfall tax base is not calculated solely from the relevant income. As soon as the legal entity is considered to be a taxpayer of the windfall tax according to the above criteria, the windfall tax is determined on the basis of the tax base derived from all its income.

The windfall tax base is set as a positive difference between the compared tax base and the arithmetic mean of the adjusted comparative tax bases.

1.       Compared tax base

The compared tax base is a tax loss or a positive tax base for the current tax period or period for which a tax return is filed (before the application of items reducing the tax base and items deductible from the tax base and without including income from foreign sources that may be taxed abroad in accordance with an international treaty, and related expenses), which is specified on line 200 of the tax return. If it is negative, it is considered to be zero.

If the taxpayer does not have the calendar year as the tax period or the period for which it submits a tax return, it falls only partially within the years 2023-2025, the compared tax base is only the aliquot part of the tax base for that period.

2.       Comparative tax base

The comparative tax base is a tax loss or a positive tax base (before the application of items reducing the tax base and items deductible from the tax base and without including income from foreign sources that may be taxed abroad in accordance with an international contract, and related expenses) for the tax period or period for which a tax return is filed, beginning from 1 January 2018 and ending by 31 December 2021.

If the comparative tax base is determined for a period other than the compared tax base, the comparative tax base shall be considered as being calculated pro rata as if the comparative tax base were to be determined for an equally long period.

3.       Adjusted comparative tax base

The comparative tax base shall then be adjusted by increasing it by an absolute value of 20% from that base.

4.       The arithmetic mean of the adjusted comparative tax bases

For the calculation of the windfall tax, it is necessary to establish a simple arithmetic average of the adjusted comparative tax bases. If it is negative, it is considered to be zero. Within a group of enterprises with unexpected profits, the averages of the adjusted comparative tax bases can be decreased and increased under certain conditions.

Windfall tax and tax rate

The windfall tax rate is 60%. The tax is calculated as the product of the windfall tax base, rounded down to the nearest thousand crowns, and the tax rate for this tax base. A tax deduction cannot be applied and the windfall tax is not included in the tax obligation for the purposes of applying the imputation method.

Windfall tax advances

Although the windfall tax will be determined and paid for the first time in 2024, the advances on this tax will be due as early as in 2023. For these purposes, it will be necessary to calculate a fictitious windfall tax.

For further information on this issue and in case of any questions, please contact our specialists. 

Author: Olga Těhlová, Tax Senior