Spain approves windfall levies on banks and energy companies

Background

On 12 July 2022, the Spanish Prime Minister, Pedro Sánchez, announced the Spanish government's intention to increase public revenues during 2023 and 2024 by targeting the windfalls obtained by banks and energy companies due to the current economic situation. Since then, the initial proposals released by the Spanish government have been amended several times during the parliamentary process which has finally concluded with a legal text heavily criticised by both sectors - and which departs from the position that the new levy shall not be classified as a tax, but rather a levy of a non-taxable nature.

Scope, rates and entry into effect

Most of the electricity, gas and oil companies will pay 1.2% of their net turnover, adjusted to exclude some elements of income. Only the Spanish business of companies and groups with a turnover equal to or exceeding Euro 1bn in 2019 will be within scope as long as the net turnover in 2017, 2018 and 2019 derived from an energy business as a regulated energy operator was not below 50% of the total net turnover of the group for each of those years.

Banks will be required to pay 4.8% of their net interest income plus net commissions. Any banks (or banking groups) which operate in Spain and had an amount of net interest and commissions for the year 2019 equal to or exceeding Euro 800m will be within scope.

Both windfall “levies” will come into force temporarily for 2023 and 2024. At the end of 2024, when the new levies come to an end, an evaluation of their application will be made and the possibility of making them permanent will be reconsidered.

Why energy and banking sectors? Levies or actually taxes?

The government has explained that, on the one hand, in extractive and energy businesses, margins have recovered strongly after the pandemic and in the first quarter of 2022 were above their pre-pandemic levels. On the other hand, the increase in interest rates and commissions is likely to have a positive impact on banks, improving their profitability. As a result of this, it is considered that large economic groups in the energy sector and banks should contribute to strengthening the public finances as these are likely to have increased profits in the current economic situation.

However, due to the difficulties of taxing only windfall gains arising from the economic circumstances, both have been approved as non-tax public contributions (“prestaciones patrimoniales públicas no tributarias”), in essence a sort of levy. This controversial legal term has been developed to overcome difficulties of imposing taxes and in order to fund specific public services.

Comment

The Spanish government expects to raise Euro 3.5bn per year to tackle high energy prices and to allow for specific measures to combat the harmful effects of inflation, especially to help the most vulnerable. However, aside from the actual effectiveness of the new windfall levies (which cannot be legally passed on to customers, though whether this actually happens is of course very difficult to demonstrate), entities affected argue that these “levies” do not tax extraordinary profits resulting from the economic situation, but ordinary sales by energy companies and the ordinary profits of banks.

It is far from certain that the Spanish government will succeed in court in defending the non-tax nature of these windfall levies, given the existing case law from the Constitutional Court in Spain around the concept of non-tax levies of this nature. If the court determine that the levies have a tax nature, the law making process used for the enactment of the windfall levies would directly have the effect of overriding them. Furthermore, the Supreme Court has admitted an appeal to decide whether the tax authorities can demand in the same financial year in which this law comes into force these levies in order to be able to act already on the profits of the financial year 2022. It would therefore not be surprising to see court decisions on the matter that override these potentially retroactive "hidden taxes" and force the Spanish Treasury to pay back what has been collected, together with statutory interest.

Similarly, the Spanish levies may have to contend with measures adopted by the European authorities. Although the government has tried to include some final modifications in order to comply with EU regulations (such as Council Regulation (EU) 2022/1854 of 6 October 2022 on an emergency intervention to address high energy prices or the opinion of the ECB of 2 November 2022 on the imposition of temporary levies on certain credit institutions), nor is it possible to rule out further difficulties in connection with meeting relevant EU requirements.

In this connection, doubts remain as regards the scope of the new bank levy for non-Spanish banking groups. Initially, this windfall “levy” was intended only for Spanish banks, however, the government attempted to broaden its scope during its parliamentary process - this was both one of the recommendations that the ECB included in its opinion in order to avoid a distortion of competition and also one of the Spanish banks' demands. But the Law as finally approved does not include any express reference to foreign banks and how the Euro 800m threshold should be construed in relation to them. It is important that this aspect of the rules should be clarified by the government as soon as possible.