This article is brought to you in collaboration with the European Commission.
The European Commission today proposed a Debt Bias Reduction Allowance, or DEBRA, to help businesses access the finance they need and become more resilient. This measure will support businesses by introducing an allowance that will give equity the same tax treatment as debt. The proposal states that increases in a taxpayer’s equity from one tax year to the next will be deductible from their taxable base, similar to what happens to debt.
This initiative is part of the EU business tax strategywhich aims to ensure a fair and efficient tax system across the EU and contributes to the Capital Markets Unionmaking financing more accessible to EU businesses and promoting the integration of national capital markets into a genuine single market.
The current pro-debt bias of tax rules, whereby companies can deduct the interest attached to debt financing – but not the costs of equity financing – may encourage companies to take on debt rather than increase their own funds to finance their growth. Excessive debt levels make companies vulnerable to unforeseen changes in the business environment. The total indebtedness of non-financial corporations in the EU amounted to nearly €14.9 trillion in 2020, or 111% of GDP. In this context, it should be emphasized that firms with a sound capital structure may be less vulnerable to shocks and more inclined to invest and innovate. Therefore, reducing overreliance on debt financing and supporting eventual rebalancing of corporate capital structure can have a positive impact on competitiveness and growth. The combined approach of equity deduction and limited interest deduction is expected to increase investment by 0.26% of GDP and GDP by 0.018%.
Valdis DombrovskyExecutive Vice President for an Economy that Works for People, said, “European companies should be able to choose the source of financing best suited to their growth and their business model. By making new equity tax deductible, just as debt currently is, this proposal reduces the incentive to increase their borrowing and allows them to make financing decisions based solely on business considerations. As part of the EU’s agenda to ensure a fair and efficient tax system, it will make financing more accessible to EU businesses, especially start-ups and SMEs, and help create a genuine single market capital. This will be important for the green and digital transitions, which require new investments in innovative technologies that could be financed by increased equity.”
Paulo GentiloniCommissioner for the Economy, said: “In these dark and uncertain times, we must act not only to help our companies face their immediate challenges, but also to support their future development. Today, we are taking action to make the tax benefits of equity comparable to those of debt for companies looking to raise capital. We want to give start-ups and innovative SMEs across the EU a boost. This harmonized debt-equity solution will make Europe’s business environment more predictable and competitive, stimulating the development of our Capital Markets Union. Our proposal will help businesses build stronger capital, making them less vulnerable and more likely to invest and take risks. And it will be good news for jobs and growth in Europe.”
The green and digital transition requires new investments in innovative technologies. Taxation has an important role to play in encouraging and enabling businesses to develop and grow in a sustainable way. An equity funding allowance can facilitate bold investments in cutting-edge technology, especially for start-ups and SMEs. Equity is especially important for fast-growing, innovative companies in their early stages and for scale-ups that want to compete globally.
DEBRA follows the Communication on business taxation for the 21stst Century, which sets out a long-term vision to ensure a fair and sustainable EU business environment and tax system, as well as targeted measures to promote productive investment and entrepreneurship and ensure efficient taxation . The proposal also contributes to the Capital Markets Union Action Plan (CMU), which aims to help businesses raise the capital they need, especially as they navigate through the post-pandemic period. The CMU encourages long-term investments to support the sustainable and digital transition of the EU economy.