On 11 May 2022, the EU Commission released a Directive Proposal on laying down rules on a debt-equity bias reduction allowance (“DEBRA”) and on limiting the deductibility of interest for corporate income tax purposes (the “Proposal”).
The Proposal is in line with the Commission Communication on Business Taxation for the 21st century, which singles out the pro debt bias of tax rules as a relevant issue to be tackled by European institutions. The purpose of the Proposal is to foster equity financing through an allowance on equity that would be deductible for corporate tax purposes. This measure would be complemented by an additional restriction placed on the deductibility of exceeding borrowing costs.
In terms of timing, the Proposal provides that member states shall adopt the Directive by 31 December 2023 at the latest and the provisions of the Proposal should apply as from 1 January 2024. However, this initial plan in terms of timing will most probably not become reality given that the examination of the Proposal at EU Council level has now been suspended due to the many interlinkages with other current EU corporate tax initiatives which the EU Council would like to put forward first. Therefore, the future of the Proposal is uncertain at this stage.
Still, because this Proposal might be brought back to the table in the future, this article considers the key commercial
reasons for debt funding, provides a clear and concise overview of the Proposal, and analyses the various issues raised by the proposed DEBRA and interest limitation rule.