Paolo Gentiloni, the European Commissioner for Economy, presented, on Wednesday 11 May, the European Commission’s new proposal for a directive, known as ‘DEBRA’ (Debt-Equity Bias Reduction Allowance), concerning deductible tax incentives to reduce debt.
With this measure, the Commission hopes to promote access to the finance that companies need to become more resilient, by introducing a franchise that will give equity the same tax treatment as debt. Thus, increases in a taxpayer’s equity from one tax year to the next will be deductible from the tax base, as is the case for debts.
“It is also an important building block of the Capital Markets Union, our plan to build a true single market for capital in the EU”, said Mr Gentiloni (see EUROPE 12562/9).
According to the Commission, the current tax rules favour debt, as they allow companies to deduct the interest associated with debt financing, as opposed to the costs associated with equity financing. The total debt of non-financial corporations in the EU amounted to almost €14.9 trillion in 2020, or 111% of GDP. DEBRA would encourage companies to issue shares rather than borrow.
“This is a problem because it encourages companies to make economic decisions based purely on their tax treatment rather than on commercial considerations. That may ultimately leave businesses more vulnerable to insolvency and financial instability”, he explained.
The proposal aims to create a level playing field for debt and equity by making equity tax deductible, as is currently the case for debt. The Commission estimates that this approach of combining an equity exemption with a limitation on the interest deduction should increase investment by 0.26% of GDP and GDP by 0.018%.
“Taxation should be a means to an end, not a goal in itself. I want companies to be able to choose the source of financing that is best for their business-model”, stressed Mr Gentiloni. “But for that to happen, equity must receive a similar tax treatment as debt, so that companies can consider both options on an equal footing”.
Six Member States - Belgium, Cyprus, Italy, Malta, Poland and Portugal - already have similar schemes in place, he said.
Asked about the EU Council’s unanimity in tax matters, which many MEPs question, Mr Gentiloni replied: “in the Commission, we are guardians of the treaty, but it’s quite reasonable to open this debate on unanimity, especially in some sectors like taxation”.
To read the European Commission’s proposal: https://aeur.eu/f/1la (Original version in French by Anne Damiani)