COMMISSION STAFF WORKING DOCUMENT EXECUTIVE SUMMARY OF THE IMPACT ASSESSMENT REPORT Accompanying the document Proposal for a Council Directive on laying down rules on a debt-equity bias reduction allowance and on limiting the deductibility of interest for corporate income tax purposes
Date: 2022-05-11
Institutions: Directorate-General for Taxation and Customs Union, European Commission
Subjects: basis of tax assessment, corporation tax, interest, tax avoidance, tax harmonisation, tax law, tax relief, taxable income

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   EUROPEAN COMMISSION  Brussels, 11.5.2022  SWD(2022) 146 final  COMMISSION STAFF WORKING DOCUMENT  EXECUTIVE SUMMARY OF THE IMPACT ASSESSMENT REPORT  Accompanying the document Proposal for a Council Directive on laying down rules on a debt-equity bias reduction and on limiting the deductibility of interest for corporate income tax purposes {COM(2022) 216 final} - {SEC(2022) 204 final} - {SWD(2022) 144 final} - {SWD(2022) 145 final}  
 
 
Executive Summary Sheet  

Impact assessment for an initiative to address the debt-equity bias – “DEBRA” 

A. Need for action 

What is the problem and why is it a problem at EU level?  

Tax systems in the EU allow for the deduction of interest payments on debt when calculating the tax base 
for corporate income tax purposes, while costs related to equity financing, such as dividends, are mostly 
non-tax  deductible.  This  asymmetry  favours  the  use  of  debt  over  equity  for  financing  investments  and 
contributes – alongside other factors such as the preference of existing equity owners to avoid the dilution 
of  control/voting  rights,  limited  access  to  equity  financing,  or  debt  financing  being  cheaper  than  equity 
financing  –  to  an  excessive  accumulation  of  debt  for  non-financial  corporations.  Excessive  debt  levels 
make businesses vulnerable to unforeseen changes in the business environment and increase their risk of 
insolvency, particularly in times of crisis.  

Furthermore,  the  need  to  incentivise  equity  investment  is  now  even  stronger  in  view  of  meetings  the 
demands  of  the  twin  digital  and  green  transitions.  The  scarcity  and  higher  cost  of  equity  affects  all 
companies,  but particularly  young  and innovative businesses, which due  to  their risk profile, often have 
limited access to external debt funding and depend on equity investment. 

Six Member States  have been frontrunners in  putting in  place  some form  of tax allowance for equity to 
address the debt-equity bias. However, these national measures can create distortions and a misallocation 
of  investments  in  the  single  market  if  businesses  base  their  decision  on  the  availability  or  not  of  an 
allowance  on  equity.  When  applied  at  national  level  only,  without  a  harmonised  anti-tax  avoidance 
framework at the EU level, these measures can also create loopholes that can be exploited for aggressive 
tax planning purposes and increase harmful tax competition among Member States. 

What should be achieved? 

The general objective of the initiative is to address the debt-equity bias consistently throughout the EU and 
in doing so contribute to the proper functioning of the internal market. 

More specifically, the initiative aims to achieve the following three objectives: 

1.  Incentivise equity investment, making the EU economy more stable and resilient. 
2.  Make equity investment more accessible, particularly to SMEs, young and innovative firms to 

foster the digital and green transitions. 

3.  Introduce a common and strong framework of anti-abuse measures to prevent the tax allowance 

from being abused for aggressive tax planning purposes. 

What is the value added of action at the EU level (subsidiarity)?  

The problem is the same in all EU Member States, since all EU Member States favour debt over equity in 
their tax treatment.  In  addition,  a patchwork of actions by six Member States  to  address  the debt-equity 
bias may have undesirable effects, leading to investment misallocations  and leaving open loopholes that 
can be exploited for harmful tax practices.  

Within the Union, national approaches risk distorting the internal market and could make some Member 
States vulnerable to tax arbitrage. Only a common EU framework can make the system simpler and more 

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efficient for firms while preventing any abuse for tax avoidance purposes.  

B. Solutions 

What are the various options to achieve the objectives? Is there a preferred option or not? If not, why? 

The baseline (option 0) represents the status quo: the difference of tax treatment between equity and debt 
persists, resulting in a sustained bias towards debt.  National measures implemented by Six Member States 
may distort investment decisions in the internal market. There is no common EU framework to address the 
debt-equity  bias  which  would  mean  that  the  problem  persists.  Several  policy  options  were  therefore 
considered. 

Option 1 would introduce a tax allowance on the stock of corporate equity1. Profits and losses would be 
excluded in  order to  ensure that the allowance is only  granted for  long-term equity. The duration  of the 
allowance is unlimited. 

Option  2  would  introduce  an  incremental  tax  allowance  of  corporate  equity  (the  same  definition  of 
corporate equity as option 1) but in this case granted on the difference in the level of net equity at the end 
of  the  tax  year  compared  to  the  level  of  net  equity  at  the  end  of  the  previous  tax  year.  This  allowance 
would be granted for ten years in order to emulate the average maturity of debt. 

Option  3  would  envisage  an  identical  notional  interest  deduction  for  debt  and  equity.  This  means  a  tax 
allowance  on  corporate  capital  (i.e.  equity,  as  per  Options  1/2,  and  debt)  while  disallowing  current 
deductibility  of  interest  payments.  This  option  perfectly  eliminates  the  debt-equity  bias,  but  has  fiscal 
implications dependent on the level of the notional interest rate chosen. Since the allowance is based on 
the full stock of capital, the duration of the allowance is unlimited like in Option 1. 

Option  4  would  completely  disallow  the  deductibility  of  interest  expenses.  This  fully  aligns  the  tax 
treatment of debt and equity costs by making both non-deductible. Like Option 3, it suppresses the debt-
equity bias totally, but at the expense of economic growth and employment. It would also require Member 
States  to  renegotiate  their  Double  Tax  Treaties  and  would  open  up  new  loopholes  for  tax  planning 
opportunities.  It  could  also  have  negative  effects  in  terms  of  the  EU  single  market’s  business 
competitiveness vis-a-vis other jurisdictions, where this deductibility exists. 

Option  5  would  combine  an  incremental  tax  allowance  of  corporate  equity  (same  as  proposed  under 
Option  2)  with  a  partial  limitation  of  tax  deductibility,  which  could  be  obtained  by  reducing  interest 
deductibility by a given proportion for all companies. It is proposed to limit the deductibility to 85% of the 
excess borrowing costs (interest paid minus interest received). Like in Option 2, the allowance would be 
granted for ten years. 

Option  5  is  the  preferred  option.  It  successfully  addresses  the  debt-equity  bias,  while  balancing  the 
budgetary impacts and addressing the fairness aspects of the tax system. It is expected to have a positive 
impact on investment and GDP, and moderate impacts on employment.  

What are different stakeholders' views? Who supports which option?  

1  Equity  definition  in  the  sense  of  this  initiative  comprises  subscribed  capital,  the  share 
premium accounts, revaluation reserve and reserves. 

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The majority of business associations and corporations (which represent a majority of respondents) see an 
EU-wide  measure  as  preferable  to  country-specific  approaches.  They  think  that  an  allowance  for  equity 
would support the economic recovery from the  COVID-19 health crisis  and help  businesses  with  cross-
border activities in the single market. An allowance on equity (Options 1, 2 and 5) is markedly preferred 
to a disallowance of interest deductions (Option 4) or an identical notional interest deduction for debt and 
equity alike (Option 3). 

Some  business  associations  support  a  special  measure  for  SMEs,  because  it  is  more  difficult  for  such 
businesses to access equity and debt financing, and these respondents to the public consultation stress the 
importance  to  design  effective  anti-abuse  measures.  Some  business  associations  are  opposed  to  any 
change in the deductibility of debt. Finally, a financial organisation suggests favouring the allowance on 
new equity (Option 2 and 5) since it is the only measure that would effectively encourage new investments 
in equity. 

An  NGO  agrees  with  the  problem  of  the  debt-equity  bias  but  cautions  on  fiscal  impacts.  According  to 
some citizens, the current low rates of credits and loans do not indicate the need to intervene in this market 
by reducing the indebtedness of entrepreneurs. An academic considers an EU action for an allowance on 
equity  as  problematic,  since  it  does  not  account  for  the  interaction  between  the  income  taxation  of 
corporations and individuals. 

C. Impacts of the preferred option 

What are the benefits of the preferred option (if any, otherwise of main ones)?  

Option 5 provides for a reduction of the debt-equity bias, while preventing a negative impact on Member 
States’ budgets. A limit to the duration of the allowance to 10 years prevents that the measure transforms, 
over time, into a stock-based allowance and therefore further limits the impact on Member States’ public 
finances compared to Option 1. It will also be less costly than Option 2, since it combines the allowance 
with a reduction of the tax deductibility of debt-related interest payments.  

This option, like the others, will provide for a common and strong framework of anti-abuse measures to 
prevent  aggressive  tax  planning  practices  at  EU  level.  It  will  create  a  level  playing  field  and  reinforce 
financial stability of European private companies, while easing access to the financing market for young 
and innovative firms. 

What are the costs of the preferred option (if any, otherwise of main ones)?  

The administrative cost for businesses are negligible or very low. The administrative burden of businesses 
engaging in cross-border activities would be eased due to the harmonisation of equity allowances across 
Member States. A decrease of the compliance cost for businesses operating cross-border is expected. 

Costs for tax administrations would be limited to some additional checks, when auditing tax payers.  

What are the impacts on SMEs and competitiveness?  

The initiative aims to provide a level playing field throughout the EU. Currently, SMEs can benefit from 
an  allowance  on  equity  only  if  they  are  tax  residents  in  one  of  the  six  Member  States  with  a  national 
allowance in place, while multinational enterprises (MNEs) can use a subsidiary in one of these Member 
States  to  benefit from  it. With DEBRA,  an allowance on equity  will be  available in  all 27  EU Member 
States for all businesses, including SMEs and thus provide substantial benefits to them. 

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In  terms  of  competitiveness,  the  initiative  would  decrease  the  cost  of  equity  and  make  equity  more 
accessible to SMEs, young and innovative companies, which will boost investments and increase stability 
of  the  European  financing  market,  making  firms  in  the  European  market  more  stable  and  resilient  to 
financial crises.   

Will there be significant impacts on national budgets and administrations?  

The impact assessment shows that the impact for national budgets would be very limited. 

No impact is expected in terms of control costs for tax administrations with a national allowance for equity 
already in place. For tax administrations of the other Member States, additional elements will need to be 
reviewed, but no significant impact is anticipated in terms of workload.  

Will there be other significant impacts?  

No 

Proportionality?  

Action  would  not  go  beyond  what  is  needed  to  suppress  the  debt-equity  bias.  Taking  into  account  a 
limitation of interest deduction, it will strongly decrease or even suppress any cost for national budgets, 
achieving the objective with a limited fiscal impact.     

D. Follow up 

When will the policy be reviewed?  

The Commission will regularly assess the implementation and enforcement of the initiative in the various 
Member States. Such assessment will be conducted mainly on the basis of data from Member States.  

Five years after the implementation of the instrument begins, the Commission will evaluate the results of 
the  policy,  with  respect  to  its  objectives  and  the  overall  impacts  on  tackling  the  debt-equity  bias.  In 
addition  the  effective  application  of  the  anti-tax  abuse  framework  as  well  as  the  overall  impact  on  tax 
revenues, businesses and the internal market will be evaluated.  

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