Czech lawmakers approve windfall tax on energy firms and banks

A steep 60% windfall tax has been approved by the Czech lower house. The aim is to raise €3.4 billion next year from profits deemed excessive in order to help people and businesses affected by rising electricity and gas prices.

Since Russia's invasion and subsequent reductions in Russian gas supplies, power prices have increased sharply in Europe.

Prague's centre-right government is seeking to tax additional profits from energy groups, such as the majority state-owned utility CEZ and other energy traders, miners and wholesale fuel traders.

This plan upset the affected sectors, and one energy company announced that it would be moving its trading activities overseas.

Similar to other European countries' taxes, the tax will be in effect for three years starting in 2023. Senate approval must be given.

Because it includes electricity producers, the Czech tax is beyond what has been agreed to be a regulation of the European Union. They will be already affected by EU-wide price caps for wholesale electricity prices and on banks.

This tax is applicable to profits exceeding 120% of 2018-2021 average, and it comes on top a 19% corporate rate.

The government plans to raise 85 billion crowns (or about 1.2%) of the gross domestic product next year through advance tax payments and smaller amounts in the two following years.

Even with the extra revenue, government expects a central-state budget deficit around 4% of GDP in next year.

Windfall taxes have been introduced in Italy and Germany. The latter has imposed a 25% tax for energy companies. The British government is currently considering a plan to increase windfall taxes for oil and gas company profits.

Hungary is already pursuing windfall income from banks and energy companies.

CEZ will be most affected by the Czech tax, along with ORLEN Unipetrol (PKN.WA), which has warned that it could affect its investments.

Tax also applies to six Czech banks: CSOB (KBC.BR), Ceska Sporitelna(ERST.VI), Komercni Banka [BKOM.PR], UniCredit (“CRDI.MI”), Raiffeisenbank (MONET.PR)

FIRMS ANGERED

Privately-owned EPH and Sev.en Energy are both affected.

EPH, a private company, said that the decision to include foreign commodity trade revenue was "absolutely absurd". It stated that it would relocate its commodity trading, which has an estimated volume of more than 500 billion euros this fiscal year, to another country.

Daniel Castvaj, EPH Communications Director, stated that "our European trading will develop elsewhere in the country, the state budget would lose billions of revenue and the Czech Republic's economic activity will be reduced with extraordinary added value."

Sev.en stated that the "unprecedented tax" would "take money away from the only firms able to invest new power and heating plant."

Bank shares rose on Friday, but fell in recent months. CEZ was down 34% at 812 crowns, compared to June's 13 year high.

CEZ predicts that its adjusted net profit will rise threefold to $60-65 billion crowns ($2.60billion) this year.

Milan Lavicka, an equity analyst at J&T Banka said that CEZ would be the most affected. He added: "The impact on banks isn't so bad because there aren't so many windfall profits in the banking industry."

Komercni Banka reported Friday a 34% increase in third quarter net profit year-on-year. MONETA estimates that the tax will have an impact of €2bn by 2023-2025.

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