On Monday, 14 June, the European Commission published its roadmap for drafting a directive (Debt-Equity Bias Reduction Allowance or DEBRA) expected in the first half of 2022. This initiative aims to encourage companies to finance their investments through equity contributions instead of resorting to debt, as announced in its May communication on business taxation (see EUROPE 12720/15).
Many corporate tax systems in the EU actually encourage debt financing by allowing interest payments to be deducted but not the costs related to equity financing, such as the payment of dividends.
Six Member States—Belgium, Cyprus, Italy, Malta, Poland, and Portugal—have already implemented a tax allowance on equity to combat this imbalance between debt and equity. Nevertheless, the European Commission believes that the lack of coordination between Member States may give rise to a risk of tax evasion and to misallocation of investments in the single market.
Consequently, its future legislative initiative would need to introduce a premium for new equity-financed investments to reduce the tax incentive favouring indebtedness.
To achieve this objective, the European Commission sees two possible approaches. The first would consist of either disallowing the deductibility of interest payments or creating an incentive for equity financing by allowing notional interest to be tax deductible.
The second approach would consist of allowing notional interest to be deducted on all corporate equity, new corporate equity, or corporate capital.
The European Commission explains that a special measure could be designed for SMEs, which have more difficulty accessing certain forms of equity financing.
In addition, these measures would need to be combined with anti-abuse provisions to prevent the tax allowance from being used for tax-avoidance purposes.
See the roadmap: https://bit.ly/3grH3ES (Original version in French by Marion Fontana)