The Spanish government recently approved a further one-year extension of its windfall tax on credit institutions to 2025. Ukraine has also introduced an additional levy on banks that applies to profits earned in 2023 onwards. In doing so, Ukraine joins a slowly growing group of countries that have introduced measures targeting banks in recent years. Others in Europe to have enacted such measures include Italy, the Czech Republic, Hungary and Lithuania.
These taxes generally take the form of an additional levy or increased corporate income tax (CIT) rates, but why are they so appealing? The rise in such measures has been driven by various factors some of which are specific to the circumstances in a particular jurisdiction. However, other drivers are more generally applicable. For instance, one of the wider influencing factors has been the rise in interest rates in a number of jurisdictions, in part driven by increases in European Central Bank rates. This has led to public pressure in certain jurisdictions to tax the extra profit that campaigners argue has been made by banks in recent years. With many jurisdictions feeling the pinch in the current economic climate, it is perhaps unsurprising that this is one of the options being considered to raise much-needed revenues. However, not all are agreed that bank windfall taxes are the right tool for the job. Will they in fact raise revenue? Could they be subject to constitutional challenges? Could they turn out to be counter-productive and lead to further inflation and increases in interest rates?
In this article, we consider the measures that have been enacted in Italy, Spain, the Czech Republic and Ukraine and their potential impact in those countries and beyond.
The Italian one-off tax on interest margins
The Italian extraordinary windfall tax on banks was, somewhat unexpectedly, first announced in August 2023 and the rules have subsequently been amended multiple times. Law Decree No. 104/2023 was eventually adopted by the Italian Parliament in October 2023. The rules entered into force on 10 October 2023.
The new rules establish that a one-off tax, to be payable in 2024, at the rate of 40% should apply to the portion of interest margin realized by Italian credit institutions, including Italian branches of foreign credit institutions, in the 2023 fiscal year (for banks that adopt the calendar year) that exceeds 10% of the interest margin realized in the 2021 fiscal year. The amount of tax payable (tax ceiling) is capped at 0.26% of the risk-weighted assets, as determined at the closing date of 2022 fiscal year. The tax is not deductible for CIT purposes. As an alternative to paying the tax, the banks may opt to allocate at least 2.5 times of the additional tax amount to their non-distributable reserves.
The Italian windfall tax regime has come under much criticism from market participants and the European Central Bank (see opinion here), including in respect of its efficiency, impact on the banking sector and economy in general. This concern was not unwarranted as the initial announcement of the measure in August 2023 led to more than EUR 10 billion being wiped off shares in Italian financial institutions in the day following the announcement. There are also concerns that the focus on interest margin will lead to further increases in interest rates, thereby compounding the issue the measure is trying to tackle.
Furthermore, some of the larger credit institutions have announced that they will, instead of paying the tax, make use of the option of allocating an amount to reserves. Whilst this might meet some of the European Central Bank’s concerns about the ability of individual credit institutions to build strong capital bases, it does rather call into question whether the initially expected revenues will in fact be raised.
Spain’s strategic levy on financial sector amid economic shifts
Amidst challenging economic conditions, Spain, under its current left-leaning coalition government, in addition to the Energy Temporary Levy (applicable to major players in the energy sector), has strategically introduced the Financial and Credit Institutions Temporary Levy, as per Law 38/2022, of 27 December 2022. The levy, initially effective for fiscal years 2023 and 2024, is reflective of the government’s progressive approach to generating additional state revenues from financial sector while addressing broader economic concerns. On 27 December 2023, the Spanish Prime Minister announced that the levy would be extended by an extra year and would apply to the 2025 fiscal year.
The levy is characterized as a “non-tax public levy”, a distinction that places this levy (and the Energy Temporary Levy) within a unique legal framework. Governed by Law 38/2022, it also aligns with the stipulations of the Spanish General State Budget Law and the Spanish General Tax Law. This legal structuring ensures that the levy is integrated seamlessly into Spain’s existing tax system while addressing specific economic circumstances (such as the inflation, which is considered to be in the general interest).
The levy targets credit and financial institutions operating in Spain with interest and commission income exceeding EUR 800 million in the 2019 fiscal year. This approach ensures that the levy is focused on the larger, more influential financial entities, aligning the levy with their financial strength and capacity within the Spanish economy. The levy rate is 4.8% of the institution’s net interest and commission income, and is payable in advance. For CIT groups, interest and commission income is to be determined at CIT group level and the levy shall be payable by the group’s representative entity. The levy is not deductible for CIT purposes.
It appears that, in 2023, amounts raised from the levy were close to initial expectations. In particular, for the 2023 fiscal year Spanish financial and credit institutions contributed in total approximately EUR 1.26 billion. The first payment, effected in February, representing 50% of the total levy, amounted to EUR 637.1 million, and the second payment in September of EUR 626 million.
The introduction of the levy and its collection results in 2023 may be indicative of the broader progressive agenda aimed at balancing economic needs with social and environmental considerations. At the same time, the new levy was criticised by some of the larger credit institutions in Spain and the European Central Bank, which warned of the adverse effect on economic growth (see opinion here), while some financial institutions launched appeals against the levy at Spain’s High Court.
Czech CIT surcharge on banks’ excessive profits
The Czech windfall tax on certain taxpayers in the fossil fuel and energy sectors and banks was introduced in November 2022. It takes the form of an additional tax on qualifying excessive profits for 2023 to 2025, which applies on top of standard CIT.
The windfall tax applies to banks that meet both of the following criteria: (i) their net interest income for the relevant reporting period from 2023 to 2025 constitutes at least CZK 50 million (approximately EUR 2 million), and (ii) their net interest income for the first accounting period ending on or after 1 January 2021 was at least CZK 6 billion (approximately EUR 242 million).
The windfall tax, which is to be paid on prepayment basis, applies an additional tax of 60% on “qualifying excessive profits”. This is the portion of a bank’s CIT tax base for a particular year that exceeds 120% of the bank’s average CIT base for 2018 to 2021. This means that the windfall tax covers all of a bank's profits, not just those representing net interest income, provided the bank meets the net interest income thresholds.
The decision to introduce the windfall tax was unpopular with Czech businesses, with some warning that this could drive them out of the Czech market, which seems to have materialised in certain cases. They claimed that the tax disregarded the business cycle, distorted the market balance between supply and demand, and undermined the trust in the tax system.
The Czech Finance Ministry originally expected that the new tax could bring in CZK 85 billion (approximately EUR 3.5 billion) in total (both from banks and companies in the energy sector) in 2023. However, later in November 2023, the Ministry admitted that the amount may in fact be much less than initially expected, especially for the bank tax. It is unclear whether this was due to unrealistic expectations driven by a vision of easy extra revenue and convenient scapegoating of big corporations, or whether the delayed implementation of the tax (from 2022 to 2023) and the behavioral responses by businesses were not duly considered. It was announced on 4 January 2024 that there would be a debate (with a decision to follow in March-April 2024) as to whether the period for applying the windfall tax should be shortened from three years to two.
Higher CIT rate for banks and branches in Ukraine
In Ukraine, the new windfall tax on banks, including branches of foreign banks, was introduced in December 2023. Unlike in the Czech Republic, in Ukraine the tax takes the form of an increased rate of CIT on the total profits of the bank. In place of the standard 18% CIT rate, banks will instead be subject to CIT at a rate of 50% of total profits received in the 2023 tax year. For profits in 2024 and subsequent years, bank profits will be subject to tax at the rate of 25%.
In addition, in determining their financial results for 2023, banks are not allowed to take into account losses from previous years, although it will be permitted to take these into account for tax years from 2024 onwards.
There are circumstances specific to Ukraine that have encouraged the introduction of this measure. This includes the current restrictions on outbound payments (both for individuals and businesses, on dividends as well as interest). This together with the increased policy rate of the Ukrainian Central Bank (25% from June 2022 to July 2023) and interest rates on deposits with the Ukrainian banks has resulted in banks receiving approximately profits in 2023 that are seven times higher than those in 2022.
The Ukrainian Ministry of Finance has estimated that the increased 50% CIT for 2023 will raise an additional UAH 24-25 billion (approximately EUR 600 million) in tax revenues.
Although generally market participants support the need to temporarily increase the tax on banks’ profits given the current circumstances in the country, some have criticised the current design of the measure. In particular, its retrospective effect along with increasing the tax rate by almost three times the normal rate and concerns about its discriminatory nature. Some experts say that the increased CIT tax for the 2023 tax year should not affect the stability of the Ukrainian banking system, but the further increase of the tax up to 25% for future years might be an issue.
Where do we go from here?
Although there has been a slow increase in the jurisdictions adopting such measures, they still represent the exceptions rather than the rule. Whilst tax administrations across the world face economic pressure, there are still relatively few that have opted for additional taxes on banks.
The UK, for instance, reduced the rate of its banking surcharge from April 2023. And, as recently as December 2023, rejected calls for bank profits windfall tax with the Economic Secretary to the Treasury stating this would “carry significant risk for the health and competitiveness of our banking sector…and our economy”.
The EU opted for EU-wide taxes on the energy sector (rather than the banking sector) in 2022 (with a market revenue cap for electricity producers and a solidarity contribution for fossil fuel companies). Despite some calls for a broader EU tax on windfall profits, this is not something that features high on the EU agenda. Any such measure would arguably also be premature, given that the Commission still has to review and report on the impact of solidarity contribution to the Council, which itself needs to defend the legitimacy of this pioneering windfall tax project before the European Court of Justice following a challenge from ExxonMobil.
In April 2023, the State Secretary for Finance in the Netherlands rejected calls for a general windfall levy or super CIT rate on excessive profits of companies to be introduced in the Netherlands. It was noted that there would be difficulties in defining who was in scope and plus the potential for arbitrary and unpredictable taxation. Similar considerations would be equally applicable to such a levy being imposed at an EU level.
Even for jurisdictions where there is a clearly delineated group in scope (e.g. banks or credit institutions), this has in some cases raised issues of constitutionality for those who have rules within their constitution guaranteeing equal treatment between taxpayers. Further, constitutional challenges may arise for those who seek to apply the rules retroactively.
Another challenge is drafting the rules in a fair way that does not have a negative impact on the economy or the financial sector but which still raises the desired levels of tax revenues. Measures that would impact financial stability or lead to even higher interest rates could prove unpopular in the long term, even if they are potentially enticing in the short term.
The authors would like to thank Mykhailo Razuvaiev for his contribution to this article.
