A new draft bill on taxation of energy companies' windfall profits

The bill is a result of EU’s emergency intervention regulation of 6 October 2022 about an emergency intervention to mitigate high energy prices. According to the Danish Government, the proceeds from this solidarity contributions must be passed on to the taxpayers, e.g., through financial support with the energy bills.

In accordance with the rules of the EU regulation, the bill proposes a temporary solidarity contribution payable by companies with activities in:

• crude petroleum and natural gas sectors, and
• coal and refinery sectors.

In order to be subject to the rules, no less than 75% of the taxable revenues in the fiscal year 2023 must be generated from financial activities with:

• extraction of raw materials
• mining
• petroleum refinement, or
• manufacture of coke oven products.

The bill proposes that the temporary solidarity contributions must be 33% and levied on companies that are tax resident in Denmark, i.e., including foreign companies doing business in Denmark through a permanent establishment.

The solidarity contribution will only be temporary and applicable to the fiscal year 2023.

The calculation base would be the taxable profit determined before possible offsetting of joint taxation losses and negative income subject to joint taxation in fiscal year 2023.  

The 33% solidarity contribution is, however, only payable on that part of the profits subject to corporation tax that exceeds the average taxable profit before joint taxation (stand-alone) in the first four fiscal years starting on or after 1 January 2018 increased by 20%.

It is thus only the so-called “windfall” earnings that are subject to the solidarity contribution, see the below example:

Note: The corporation tax rate for companies subject to the hydrocarbon tax scheme is 22% plus an additional 3% tax, corresponding to 25% in total

A taxable profit can, as before, be reduced with tax loss carryforwards pursuant to the current rules.

The bill proposes that the temporary solidarity contribution be paid in two instalments with preliminary amounts. The instalments fall due for payment on 1 October 2023 and at the beginning of the second month following the deadline for submitting the tax return respectively. 

Companies that are subject to payment of solidarity contribution must submit information about the expected basis of calculation on a special form no later than 1 July 2023 for the use of the determination and collection of the solidarity contribution.

Companies subject to hydrocarbon tax receive both ordinary corporation taxable income and hydrocarbon taxable income.

According to the draft bill, the solidarity contribution is both levied on the ordinary corporation taxable income and the hydrocarbon taxable income received by the companies.

Right to set off

The hydrocarbon extraction companies which are currently comprised by the provisions of the Danish Hydrocarbon Tax Act will, according to the draft bill, be able to offset the temporary solidarity contribution against the special 52% hydrocarbon tax already paid by the companies in addition to the 25% corporation tax (including a 3% extra tax). This is the same as if the companies, etc. effectively were taxed at 64% already today.

The right to set off is only applicable to income taxed under the provisions of the Danish Hydrocarbon Tax Act (chapter 2). If the company also has income that is taxable under the rules of the Corporation Tax Act, a solidarity contribution levied on that part of the income cannot be offset against the hydrocarbon tax.

The bill furthermore proposes that companies, etc. subject to hydrocarbon tax that have deducted the temporary solidarity contribution from the hydrocarbon tax for fiscal year 2023 when using the special carry-back scheme applicable to deductible asset retirement costs would be deemed to be in the same position as if they had not made a deduction of the solidarity contribution. The special rules about the payment of temporary solidarity contribution will thus not affect the hydrocarbon extraction companies’ right to use the carry-back scheme.

Exemption

In this respect, the draft bill furthermore proposes that companies, etc. subject to hydrocarbon tax will be entitled to disregard tax loss carryforwards from previous years in the determination of the special hydrocarbon taxable income that is subject to 52% tax.

Pursuant to the draft bill, this will also apply to a scenario where it will be necessary to disregard tax loss carryforwards from previous fiscal years in order to be able to use the right to set off the temporary solidarity contribution against the payable hydrocarbon tax of the year relating to the fiscal year 2023, see example below:

Companies that are subject to payment of solidarity contribution must submit information about the expected basis of calculation on a special form no later than 1 July 2023 for the use of the determination and collection of the solidarity contribution.

The draft bill is applicable to the fiscal year 2023 and the solidarity contribution will cease to apply from the end of fiscal year 2023. 

The draft bill on 33% solidarity contribution is out for consultation with deadline 24 February 2023. In that relation we are looking forward to the comments from the Ministry of Taxation in terms of the uncertainties of the draft bill, e.g., in relation to the interaction between assets subject to market to market taxation such as financial contracts and currency, etc. which can lead to a certain degree of arbitrariness.

The reason being that e.g., a value increase of an asset subject to market to market taxation in 2023 will be subject to the solidarity contribution with no possibility of deducting a corresponding loss in a subsequent income year in case of a decrease in value. Similarly, extraordinary non-recurring income realized in 2023, e.g., income from the sale of a business, assets, rights, etc. will be subject to the solidarity contribution and may potentially have a behavior-regulating effect.

If you have any questions regarding the draft bill, please feel free to reach out.