Ref. Ares(2022)3758527 - 18/05/2022
Ref. Ares(2023)20334 - 03/01/2023
Italian tax reform
compatibility of the extraordinary contribution with EU law/guidelines
The design of the new Italian contribution is driven by the VAT rules
On March 21, 2022, the Italian government has published the Law Decree No. 21/2022 providing urgent measures to
contain energy prices and counteract related economic effects, including the introduction of a windfall profits tax on
qualifying energy enterprises (article 37).
The Law Decree must be converted into law by the Italian parliament (with possible amendments) within 60 days from
its publication.
This extraordinary solidarity contribution (
contributo solidaristico straordinario) is presented as a one-off tax that shall
be paid by energy undertakings (producer, importer and retailer of electricity/gas/petroleum product) operating in
Italy1.
Its taxable basis is defined as the increase of the net VAT balance2 reported during Winter 2022 (from 01 10 2021 till
31 03 2022) and the net VAT balance reported during Winter 21 (01 10 2020 – 31 03 2021).
Since this new contribution is based on an increase of a net VAT balance, its taxable basis includes only transactions
included in the VAT scope. Therefore out of scope transactions, like some operations between a foreign headquarter
and its Italian branch, OR, financial hedges, are not taken into account for the computation of the taxable basis
whereas they can be key in the business model of energy companies.
No tax is due if the increase does not exceed either a fixed amount of 5 M€ or a relative amount of 10%.
The contribution should initially apply at the rate of 10%. However, early May, the Italian government announced its
intention to increase the rate to 25% considering the need for additional stimulus.
The tax must be paid by 30 June 2022 and it is not deductible for corporate income tax (IRES and IRAP) purposes. The
domestic VAT provisions apply with respect to related assessments, penalties and collection and litigation activities,
even if this contribution is not per se a VAT.
This new contribution raises several concerns regarding its compatibility with EU law (2) and the guidelines recently
issued by the Commission to frame tax measures taken at national level (1).
1. The new Italian tax does not follow the guidelines made by the Commission in its “RePower EU”
communication on the 8th of March, entitled “Guidance on the application of infra-marginal profit fiscal
measures”
To finance emergency measures decided by Member States, the communication mentions that “
Member States can
consider temporary tax measures on windfall profits”, that “
such measures should not be retroactive, but should be
technologically neutral and allow electricity producers to cover their costs and protect long-term market and carbon
price signals” and finally “
Annex 2 sets out the conditions those instruments should meet”.
1 “persons who carry on business in the territory of the State, for the subsequent sale of goods, in the production of electricity,
persons who produce methane gas or extract natural gas, persons who sell methane gas and natural gas and persons who
produce, distribute and trade in petroleum products”
2 Net VAT balance is defined as all transactions subject to output VAT (sales subject to VAT) minus all transactions subject to
input VAT (purchases subject to VAT) during the reference period.
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Despite the warning to design an exceptional tax without creating unnecessary market distortions, to incentivize
additional investment in renewable energy, the tax basis defined in the new Italian Law Decree does not reach this
goal.
Three examples could be provided :
1. Case of an undertaking operating in Italy through a branch : a foreign company selling gas or power (via a
network) through an Italian branch will include in its output VAT basis the sale of energy to its Italian clients
but will not include the “purchase” of energy from its foreign headquarter by application of Article 17 2 d) of
the VAT Directive. So its liability to the new tax could be significantly different from an Italian subsidiary for
which both the purchase and the sale of energy (delivered via a network) are subject to VAT and reported in
the VAT return.
2. Case of a company investing/divesting during the reference period : acquisition/disposal of assets are subject
to VAT and so are reported in the VAT return and therefore included in the computation of the tax basis of the
new tax. Therefore, a company which made investments requiring the acquisition of assets during the Winter
2021 increased the initial reference of net VAT balance, and, thus reduced the basis of the new tax, regardless
of the price of the energy. The reverse applies for a company having invested during the Winter 2022, it
increased the basis of the new tax, irrespective of the energy prices.
3. Case of a company having hedged financially its futures revenues : since most energy companies hedge all or
most of their revenues with physical or more often financial transactions, their income is usually pre-defined
and barely impacted by the volatility of the market on the short term. Due to the fact that the new tax
disregards financial transactions which are outside the scope of VAT, a company may have realized high
revenues when selling on the market at a high price during Winter 22, and, incurred significant losses on its
financial hedges over the same period. In such a case, its taxable basis for the new tax will be much higher
than the economic income realized by the company.
Please see in the exhibit to this note, a table analyzing, in more detail, each condition listed in the Annex 2 of the
REPowerEU Communication vis à vis the new Italian tax
. It clearly comes out that the Law Decree lacks to respect
many requirements.
2. Three areas of EU law can be considered to identify potential infringements with EU law
Compatibility of the new Law Decree with the
freedom of establishment
As explained above, the new Law Decree treats branches of EU companies that are established in Italy differently from
Italian subsidiary due to the fact that only transactions included into the scope of VAT are taken into consideration.
According to Article 49 of the
Treaty on the Functioning of the European Union (TFEU), restrictions on the freedom of
establishment, including restrictions on the setting up of agencies, branches or subsidiaries by nationals of a Member
State in the territory of any other Member State are prohibited. The freedom of establishment, as far as secondary
establishments are concerned, gives a national of a Member State the right to choose freely its form of establishment
in the host state, i.e. a branch or subsidiary, making any restrictions imposed by the host state incompatible with the
provisions of article 49 of the
TFEU. No overriding reasons in the public interest appropriate and necessary for ensuring
the objective of the Law Decree have been identified.
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Compatibility of the new Law Decree with
State Aid rules
In the light of EU State aid law, Member States are prohibited from adopting measures that lead to an economic
advantage for certain undertakings or sectors and thus, distort competition. Therefore the design of a tax shall be
consistent and proportionate with its objective.
In case of a windfall tax measure such as the one under consideration, the tax shall proportionately affect all the
undertakings having benefited from the high energy prices. Should the EC consider that the new tax constitutes an
incompatible State Aid, Italy should recover the tax from exempted undertakings.
Therefore, this proceeding would not reduce the financial impact for the group but would reduce the unfair treatment
as compared to exempted or less impacted undertakings.
Compatibility of the Law Decree with the
1st Protocol to the European Convention on Human Rights
(ECHR) protecting the property right
Article 1 of this first protocol provides that :
Every natural or legal person is entitled to the peaceful enjoyment of his possessions. No one shall be deprived of his
possessions except in the public interest and subject to the conditions provided for by law and by the general principles
of international law.
The preceding provisions shall not, however, in any way impair the right of the State to enforce such laws as it deems
necessary to control the use of property in accordance with the general interest or to secure payment of taxes or other
contributions or penalties.
This provision applies to tax matters and limit the possibility of States to levy taxes which indirectly requires State to
take into account the ability to pay of the taxpayer often protected by national constitution (like in Italy) and referred
to in several case law of the European Court of Justice. According to the case law of the European Court of Human
Rights, the levying of a tax is contrary to the respect for property if it imposes a "special and exorbitant burden" on
the person who has to pay it.
Since the design of the new tax does not take into consideration material items of the wealth or profitability of a
company (depreciation, financial derivatives, excise duties included in the output VAT basis but not in the input VAT
basis….), it can lead to a confiscatory tax.
In addition, since Winter 2021 was adversely impacted by the sanitary crisis which resulted into depressed energy
prices, the reference between the two winters is inappropriate to compute a tax targeting only windfall profits and
could lead to an excessive tax.
The mechanism of the new tax can even be irrational : a loss making company which has reduced its losses during
Winter 2022 as compared to Winter 2021, can be subject to the windfall tax while remaining in the red.
Finally, the non-deductibility of the new tax from the corporate income tax (IRES+IRAP) increases its economic impact
for a company and therefore the effective rate amounts rather at 35% (25%/(1-CIT rate of c.28%)).
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