EU: Proposed debt-equity bias reduction allowance

Support businesses by introducing an allowance that will grant to equity the same tax treatment as debt

Allowance that will grant to equity the same tax treatment as debt

The European Commission (EC) today proposed a debt-equity bias reduction allowance to help businesses access financing and to become more resilient.

According to the EC release, this measure will support businesses by introducing an allowance that will grant to equity the same tax treatment as debt. The proposal stipulates that increases in a taxpayer's equity from one tax year to the next will be deductible from its taxable base, similar to what happens to debt.

Also according to the EC, the current pro-debt bias of tax rules, when businesses can deduct interest attached to a debt financing—but not the costs related to equity financing—can incentivise companies to take on debt rather than increase equity to finance their growth. Excessive debt levels make companies vulnerable to unforeseen changes in the business environment. Reducing the over-reliance on debt-financing, and supporting a possible rebalancing of companies' capital structure, can positively affect competitiveness and growth.

Background

The debt-equity bias reduction allowance is a follow-up to the Communication on Business Taxation for the 21st century [PDF 620 KB] that sets out a long-term vision to provide a fair and sustainable business environment and EU tax system, as well as targeted measures to promote productive investment and entrepreneurship and ensure effective taxation. Read TaxNewsFlash

The proposal also contributes to the EU's Capital Markets Union Action Plan that aims at helping companies raise capital, particularly as they navigate the post-pandemic period. The Capital Markets Union Action Plan incentivises long-term investments to foster the sustainable and digital transition of the EU economy. 

Read a May 2022 report prepared by KPMG’s EU Tax Centre

 

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