Windfall taxes are gathering steam across Europe, but do they work?

With oil and gas prices hitting record levels and households struggling to deal with rising energy bills, one solution that has caught the eye of legislators across Europe is the introduction of "windfall taxes". Such measures are intended to impose a temporary tax on companies making extraordinary profits as a result of these unprecedented high oil and gas prices, with the additional tax revenue being used to alleviate the burden on ordinary households. The concept sounds straightforward, but designing a tax that meets these policy objectives is turning out to be anything but simple.

The windfall taxes that have already been announced in Italy and Spain demonstrate how difficult it is to ensure that such taxes are designed in a way that adequately captures windfall profits. The UK's Energy Profits Levy sidesteps the issues somewhat by focusing on the oil and gas ring-fence regime, but could face challenges if, as is currently being debated, the levy were extended to businesses outside the ring-fence regime. Whilst Austria seems likely to follow the European Commission's recommendations in its REPowerEU communication, the proposals in Germany are already meeting with some resistance and, as could also be the case with other such taxes, the threat of challenges on the grounds of being unconstitutional.

In addition to national barriers to the introduction of windfall taxes, tax administrations in Member States also have to navigate potential state aid issues and potential incompatibility with existing EU Directives.

In our briefing here, we consider these issues in greater detail.

This is an area that is developing quickly. If you would like to discuss the topics covered in this briefing with us, please contact our Tax team, our EU Regulatory and Public Affairs team or your usual Freshfields contact.