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Slovakia – 80 Percent Tax on Emission Allowances

Potential repeal of the European Emission Allowance Trading Scheme in practice

The consequences of the economic crisis currently dominate European politics. Most member states approve different measures to consolidate their public finances. In Slovakia, an increase of income to the state budget is also expected, among other things, by a new tax on emission allowances.

The tax on emission allowances has been introduced in Slovakia, entering into force on January 1, 2011. Under the new legislation greenhouse gas emission allowances allocated free of charge according to the National Allocation Plan approved for the trading period 2008 to 2012, are taxed at a high rate of 80 percent. The new tax on emission allowances has led to much professional debate regarding its compliance with the Slovak Constitution, binding international treaties and EU law. In the near future the Slovak Constitutional Court will hear these issues.


As a response to the Kyoto Protocol the European Union introduced a scheme for emission allowance trading within the Community (see Directive 2003/87/EC). The emission allowance trading scheme is based on the principle that a company (an entrant in the trading scheme) may only release into the atmosphere an amount of greenhouse gas corresponding to the number of emission allowances they have. Member States allocate emission allowances to entrants for particular trading periods (until the end of 2012, mostly free of charge) according to the NAP, which are subject to approval by the European Commission. An entrant is subsequently authorised to sell excess emission allowances to other entrants in the trading scheme or to cover excessive demand by purchasing allowances. Free trading with emission allowances must be ensured in all Member States.

The new tax was approved under Act No. 548/2010 Coll., an amendment to the Act on Income Tax, of December 21, 2010. The tax on emission allowances was incorporated into this Act in a non-standard manner.  It was the subject of an amending and supplementing proposal made in the course of approving the government’s bill on different income tax issues. Consequently, it did not include the reasoning otherwise required. The government responded this way to the allegedly non-transparent reallocation of emission allowances allocated free of charge for the trading period 2008 to 2012 to Slovak companies emitting CO2 into the atmosphere. According to calculations by the Slovak Ministry of Finance, the total estimated revenues for companies from the alleged over-allocation of allowances is €666 million for the whole trading period, of which €231 million was in 2011 to 2012. As a consequence of introducing the emission allowances tax, the Ministry of Finance estimates that the net income to the state budget should increase by €75 million a year.

Legislative framework

In principle, the tax will be imposed on allowances either transferred or remaining unconsumed in the respective year and will be calculated at the average market price of emission allowances. The only exception establishes emission allowances savings achieved because of environmental investments calculated under a Ministry of Environment regulation.

The new tax is limited in time. It applies only to emission allowances recorded in 2011 and 2012 and will expire when submitting tax declarations on the emission allowances tax for 2012. The tax must be paid by all mandatory entrants of the trading scheme, which carry out particular activities under the Act on Emission Allowances Trading, or by persons who meet the abovementioned conditions at least for a part of the calendar year. For the respective period, the taxable persons of the emission allowance tax are exempted from income tax on emission allowances trading.

Potential conflict with Community law and constitutional law

On 10 May 2011, a group of Parliament’s members has contested the legality of the tax on emission allowances at the Slovak Constitutional Court. The following arguments, in particular, may support the statement that there is a conflict between the legislation and the Slovak Constitution and international treaties (including obligations connected to Slovakia’s membership of the EU):

  • Conflict with Directive 2003/87/EC The new Slovak legislation on tax on emission allowances seems to breach the main aim of the Directive on the emission allowance trading scheme, which aims to financially motivate entrants into environmental investments and to subsequently decrease emissions released into the atmosphere (rendered by the non-consumed emission allowances). On the other hand, the tax introduced in Slovakia imposes on entrants with spare allowances an additional financial burden which, consequently, motivates them to consume all allowances allocated to them to avoid the taxation.
  • Breach of the principles of legal certainty, legitimate expectation and non-retroactivity With no reason to expect it, the tax on emission allowances was introduced during an already running trading period. Allowances had been allocated to the entrants for the entire trading period without the possibility, except in some cases, to change their amount. Consequently, this tax law has a retroactive negative effect on the rights of the taxable persons acquired before its effectiveness and hinders returns on investment.
  • Infringement of property rights Emission allowances are assets with a certain value which have been lawfully allocated free of charge to encourage environmental allowances. In consequence of the new tax, the entrants need to cover these investments from their own resources instead of income from transferred allowances. As the tax is also levied on unconsumed allowances (unrealised income) it directly affects their cash flow. The disproportionally high rate of the tax almost achieves the effects of deprivation.
  • Other The violation of freedom of establishment under community law, the right to do business, the obligation to protect and support and non-discrimination (in the Slovak Constitution), the Charter of Fundamental Rights and Basic Freedoms, and Slovakia’s breach of obligations under investment protection treaties.


Unless the Constitutional Court issues a decision suspending the effectiveness of this law by 30 June 2011, the taxable persons will be obliged to pay the first half year’s advance payment for the tax on emission allowances. Consequently, a real loss to entrants to the allowance trading scheme arises.

It cannot be ruled out that the legitimacy of the Slovak tax on emission allowances will be decided at the EU level, in particular on the basis of individual complaints to the European Commission and subsequent action against Slovakia for breach of EU law. In addition, proceedings under international investment protection treaties can be expected.

This article is of an informative nature only and under no account can it be considered to be a legal opinion. Should you need any further information on the issues addressed in this article, please contact our Law Office PETERKA & PARTNERS, Tel. +421 2 544 18 700; E-mail: office@peterkapartners.sk; www.peterkapartners.com


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