Castrén & Snellman represented Fortum Power and Heat Oy in a precedent-setting case on the relationship between EU law and national tax legislation.
The Helsinki Administrative Court ruled that the key provisions of the act imposing a temporary profit tax on electricity companies were unenforceable, as they must be deemed to be in conflict with EU law. The decision can be seen as a landmark precedent that emphasises the diligence required of legislators also in situations where an act is intended to be a temporary measure to address needs during times of crisis. The Administrative Court's decision is not yet final.
The Court assessed an urgently prepared act that faced criticism for non-compliance already during legislative drafting
The Profit Tax Act (363/2023) entered into force in March 2023 following a rushed consultation and preparation process. It was applied as a temporary – and partly retroactive – provision to companies in the electricity and fossil fuel sectors, introducing an additional profit tax on their electricity businesses for the 2023 tax year.
The Profit Tax Act is based on Council Regulation (EU) 2022/1854, which was adopted on 6 October 2022 as an exceptional emergency intervention during the energy crisis following Russia's war of aggression. The Regulation required Member States to collect market revenues exceeding a 'revenue cap' of EUR 180/MWh from certain electricity producers. The primary objective of the Regulation was to redistribute exceptionally high electricity market revenues to consumers and mitigate the harmful effects of increased electricity prices. The intention behind the EU-level regulation was to respond to the energy crisis with coordinated measures that applied to all Member States, thus avoiding measures taken by individual Member States that could further burden EU industry and consumers.
The Regulation was implemented into Finnish legislation by the Profit Tax Act. During legislative drafting, national legislators deemed that the Regulation left Member States enough leeway to implement the emergency measures in ways other than a model based directly on the market revenue cap of EUR 180/MWh laid down in the Regulation. The Profit Tax Act provides for a 30% profit tax, which is levied on companies in addition to the annual income tax on the profit of the company's electricity business that exceeds a 10% profit threshold calculated on the basis of the imputed return on equity for the previous financial year.
The Helsinki Administrative Court deemed that the national legislator did not have the authority to replace the mandatory market revenue cap laid down in Regulation (EU) 2022/1854 with a tax mechanism that is fundamentally different in structure. The Administrative Court ruled that since the amount and calculation of the profit tax differ from the revenue cap mechanism laid down in the Regulation in terms of both content and application period, the provisions in question cannot be deemed compatible with the Regulation.
Major discrepancies between the Regulation and the Act
The provisions of the national Profit Tax Act differ significantly from the EU Regulation. These differences include the following:
- Profit basis vs revenue cap: In Finland, the profit tax was based on the profit of the electricity business and the equity of the previous financial year, whereas the Regulation was based on a specific market revenue cap of EUR 180/MWh.
- Period of application: The Profit Tax Act applied to the entire tax year 2023, even though the Regulation only applied from 1 December 2022 to 30 June 2023.
- The nature of the tax: The profit tax was not deemed to target only surplus profits. The tax mechanism could also extend to regular market revenue of companies, such as the revenue of electricity providers that had already hedged the price risk of their power generation in the long term.
The Regulation's precedence obliges the non-application of national law
EU regulations are directly applicable in all Member States. While they may leave some national leeway, national courts are obliged to hold inapplicable any national provisions that conflict with EU law. The Administrative Court deemed that the Profit Tax Act deviates significantly from the objectives of the Regulation and exceeds the scope of national discretion. According to the Administrative Court, the Finnish Profit Tax Act cannot be interpreted in a way that is consistent with the Regulation , and the key provisions concerning tax determination must therefore be held inapplicable.
Landmark precedent on the relationship between EU and national law
The Administrative Court's decision forms a significant precedent on the relationship between EU law and national tax legislation. The decision renders the Profit Tax Act practically irrelevant, since the Administrative Court ruled that the provisions on the amount and calculation of the tax must be disregarded. To our knowledge, no Finnish national law has been found to be contrary to EU law to the same extent and therefore unenforceable.
According to the Administrative Court's decision, the Regulation's objective was to address only exceptionally high electricity market revenues, whereas regulation under the Profit Tax Act was based on a completely different model. Already during the legislative drafting process, the Constitutional Law Committee and the Economic Affairs Committee noted that the national Profit Tax Act law deviated significantly from the mechanisms and objectives of the Regulation. The Finance Committee stated in its comment that the Regulation was exceptionally loosely drafted, leaving the national legislator with some discretion to deviate from the Regulation's main implementation method.
The Administrative Court's decision highlights the importance of careful legislative work and emphasises how crucial it is to ensure that EU law – particularly directly enforceable EU regulations – is correctly implemented into national legislation. Careful legislative work is especially important in tax legislation, to ensure that the tax collection criteria meet the requirements under EU law.
The decision is not yet final, as the Tax Recipients' Legal Services Unit may request leave to appeal the decision from the Supreme Administrative Court. If the case is taken to the Supreme Administrative Court, it is possible that the Court will request a preliminary ruling from the Court of Justice of the European Union. At this stage, the Administrative Court did not find it necessary to request a preliminary ruling.
Our experts are happy to help if you wish to discuss electricity sector taxation or the practical ramifications of this decision in more detail.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
