A temporary tax on banks’ windfall profits could help reduce Bulgaria’s budget deficit without raising VAT, income tax or social security contributions, Fiscal Council Chair Simeon Djankov said Thursday in an analysis of the benefits of taxing banks’ excess profits in the European Union (EU). He said the measure could generate more than EUR 1 billion in revenue.
The proposal is similar to temporary schemes introduced in Czechia, Lithuania and Italy, Djankov said in an analysis of the benefits of taxing banks’ excess profits in the European Union. He added that the measure’s one-off nature limits long-term uncertainty over bank capitalization and lending.
According to the analysis, 12 EU Member States have introduced additional taxation of the banking sector in recent years: Belgium, the Netherlands, Slovenia, Estonia, Latvia, Lithuania, Czechia, Romania, Slovakia, Hungary, Spain and Italy.
The mechanisms vary, ranging from taxes on windfall profits or extraordinary net interest income to additional levies on bank revenue, assets or liabilities. The underlying economic rationale is broadly similar, Djankov said: when banks generate unusually high returns as a result of changes in the macroeconomic and interest-rate environment, part of those additional earnings can temporarily be channelled into public finances.
He said one of the main arguments for such taxation was the source of banks’ higher profits since 2022. Rising policy rates in Europe led to a rapid increase in income from loans and other interest-bearing assets, while deposit rates rose more slowly. As a result, banks’ net interest income increased significantly.
Djankov argued that much of this increase was not the result of new investment, technological improvements or greater entrepreneurial risk-taking, but rather of changes in the interest-rate environment.
Another benefit is the possibility of raising budget revenue without increasing broad-based taxes such as VAT, personal income tax or social security contributions, he said.
Czechia, for example, introduced a 60% tax on legally defined windfall profits for 2023-2025. Lithuania introduced a temporary solidarity contribution on extraordinary net interest income. Italy adopted an extraordinary measure linked to higher net interest income, while Spain imposed a levy on income from interest and bank fees.
Djankov also pointed to the possibility of linking the revenue from additional bank taxation to a specific public need. Slovenia introduced an additional levy on banks following the devastating floods of 2023, with the proceeds earmarked for reconstruction.
“This approach has a clear fiscal logic: temporary extraordinary revenue can finance temporary extraordinary expenditure,” the analysis says. It can reduce the need for additional borrowing or increases in other taxes.
Temporary taxation of windfall profits also limits long-term economic distortions, Djankov said. Czechia set the duration of its scheme in advance, Lithuania initially introduced its solidarity contribution as a temporary measure, and Italy opted for a one-off approach. A limited duration reduces investor uncertainty and the risk that additional taxation could hinder investment, bank capitalization and lending.
For Bulgaria, such a measure should not amount to a general increase in the corporate tax rate for banks, Djankov said. A more targeted approach would be a temporary tax on extraordinary bank profits above a predetermined historical profitability benchmark, with a clearly defined expiry date.
Expected proceeds of more than EUR 1 billion would allow the deficit to be reduced without raising VAT, income tax or social security contributions, he said. The one-off nature of the measure would also limit long-term uncertainty for bank capitalization and lending, bringing it closer to the temporary schemes used in Czechia, Lithuania and Italy.
In September, the Finance Ministry announced plans to tax windfall profits in 2027 earned by banks, insurers and reinsurers, retailers operating at least five food stores, telecommunications companies, currency exchange offices and non-bank consumer lenders.
Earlier this month, the Association of Banks in Bulgaria opposed the proposed additional taxation and called for the measure to be dropped. The Association said it could undermine banks’ ability to finance the economy and was inconsistent with Bulgarian and EU law.
Temporary Bank Windfall Tax Could Help Cut Deficit, Fiscal Council Chair Says THE NEWS FROM BULGARIA – NEWS AGENCY 2009-2025 2026-10-08 09:39:58
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