Remarks by Commissioner Gentiloni at the press conference on the Debt-Equity Bias Reduction Allowance – DEBRA

(Source: European Commission)

We live in uncertain and difficult times, but we try also to act and take decisions that are forward-looking and help our companies not only to cope with their immediate challenges, but also to create the conditions for them to grow, invest and create more jobs.

It is in this framework that we are today taking action to address a long-standing problem in corporate taxation: the so-called debt-equity bias.

We are proposing the Debt-Equity Bias Reduction Allowance – DEBRA – which is one of the key initiatives of the Business Taxation plan that we presented last year. It is also one of the important measures to strengthen our Capital Markets Union, our plan to build a true single market for capital in the EU.

Today, most countries’ tax systems, including in the European Union, treat debt more favourably than equity. They do so by allowing interest payments on loans to be deducted from the taxable base, without offering a similar allowance for financing through equity.

This gives businesses looking to fund investments a major incentive to borrow, rather than to issue equity.

This is a problem because it encourages companies to make economic decisions based purely on their tax treatment, rather on commercial considerations. That may ultimately leave businesses more vulnerable to insolvency and financial instability. The total indebtedness of non-financial corporations in the EU amounted to almost EUR 14.9 trillion in 2020 or 111% of GDP.

Taxation should be a means to an end, and not a goal in itself. I want companies to be able to choose the source of financing that is best for their business model. 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.

Today’s proposal will create a level playing field for debt and equity, by making equity tax deductible, just as debt currently is.

This measure will contribute to the re-equitisation of companies, making them stronger and more sustainable. This is our goal.

It will also support new, innovative businesses, which usually have more trouble securing loans than more established firms. This is also why we will be offering a more favourable rate of deduction for SMEs, given that they often have more difficulty in obtaining financing than larger companies do.

This initiative is important for individual companies, but also for the European Union as a whole. We know that the green and digital transitions can only be achieved through new and innovative investments. In fact, more than half of the green investments in the coming years should come from new technologies, and this will require sustainable financing. And equity has a key role to play in this effort.

Under our proposal, the equity allowance would be computed based on the difference between net equity at the end of the current tax year and net equity at the end of the previous tax year, multiplied by a notional interest rate.

The allowance on equity is deductible for ten consecutive tax years, as long as it does not exceed 30% of the taxpayer’s taxable income.

We already have similar schemes in place in six Member States: Belgium, Cyprus, Italy, Malta, Poland and Portugal. But an uncoordinated patchwork of rules can create room for harmful tax practices, by attracting businesses purely for tax motives. So we will have a transition period for these six Member States to build this common framework.

With DEBRA, we can ensure that EU businesses are treated equally in terms of taxation concerning their financing choices, regardless of where they are located or whether they choose to finance themselves through equity or debt instruments.

A harmonised solution to the debt-equity bias will make the business environment in Europe more predictable and more globally competitive, boosting our equity markets, if you compare them, for example, with the United States

Our proposal aims to help companies build up more solid capital, which means they will be less vulnerable and more likely to invest and take risks.

In fact, we expect the combined approach of equity allowance and limited interest deduction to increase investments by around a quarter-point of GDP, according to our impact assessment.

And that will also be good news for growth and jobs in the EU.

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