Proposal for a Council Directive on laying down rules on a debt-equity bias reduction allowance and on limiting the deductibility of interest for corporate income tax purposes

Summary:

Legislative initiative tabled by the European Commission on 11 May 2022, putting forward a debt-equity bias reduction allowance, or DEBRA.

Further information:

In May 2021, the European Commission adopted a Communication on Business Taxation for the 21st century, aimed at promoting a robust, efficient and fair business tax system in the European Union (EU). It set out a long-term and short-term vision to support the EU's recovery from the COVID-19 (coronavirus) pandemic and to ensure adequate public revenues over the coming years. In the same vein, the EU's Capital Markets Union (CMU) Action Plan aimed at helping companies to raise the capital they need and improve their equity position.

Tax systems in the EU allow for the deduction of interest payments on debt when calculating the tax base for corporate income tax purposes, while costs related to equity financing are mostly non-tax deductible. This asymmetry in tax treatment is one of the factors favouring the use of debt over equity for financing investments. With a view to addressing the tax-induced debt-equity bias across the EU single market in a coordinated way, the proposed Directive lays down rules to provide, under certain conditions, for the deductibility for tax purposes of notional interest on increases in equity and to limit the tax deductibility of exceeding borrowing costs.

The draft law applies to all taxpayers that are subject to corporate tax in one or more Member State, except for financial undertakings. Since small and medium enterprises (SMEs) usually face a higher burden to obtain financing, it is proposed to grant a higher notional interest rate to SMEs.

This proposal was tabled by the European Commission on 11 May 2022.

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Commentary and Analysis

European Network on Debt and Development (Eurodad): Press Release, 11/05/2022: Eurodad reaction to the European Commission’s proposal to tackle the debt-equity bias in taxation (DEBRA) https://www.eurodad.org/eurodad_reaction_to_the_european_commissions_proposal_to_tackle_the_debt_equity_bias_in_taxation_debra

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Official

EUR-LEX: SWD(2022)144: Staff Working Document accompanying the Proposal https://eur-lex.europa.eu/legal-content/EN/ALL/?uri=SWD:2022:144:FIN

EUR-LEX: SWD(2022)145: Staff Working Document accompanying the Proposal https://eur-lex.europa.eu/legal-content/EN/ALL/?uri=SWD:2022:145:FIN

EUR-LEX: SWD(2022)146: Staff Working Document accompanying the Proposal https://eur-lex.europa.eu/legal-content/EN/ALL/?uri=SWD:2022:146:FIN

European Commission: Better Regulation: Have Your Say: Debt-equity bias reduction allowance (DEBRA) https://ec.europa.eu/info/law/better-regulation/have-your-say/initiatives/12995-Debt-equity-bias-reduction-allowance-DEBRA-_en

European Commission: Press Release, 11/05/2022: Corporate taxation: Commission proposes tax incentive for equity to help companies grow, become stronger and more resilient https://ec.europa.eu/commission/presscorner/detail/en/ip_22_2884

European Commission: Questions and Answers on the Commission's proposal to tackle the debt-equity bias in taxation (DEBRA) (11 May 2022) https://ec.europa.eu/commission/presscorner/detail/en/qanda_22_2885

European Commission: Remarks by Commissioner Gentiloni at the press conference on the Debt-Equity Bias Reduction Allowance – DEBRA (11 May 2022) https://ec.europa.eu/commission/presscorner/detail/en%5E/speech_22_3009

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