COMMISSION STAFF WORKING DOCUMENT Subsidiarity Grid 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

EN 

  EN 

   EUROPEAN COMMISSION  Brussels, 11.5.2022  SWD(2022) 144 final/2  COMMISSION STAFF WORKING DOCUMENT Subsidiarity Grid 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 {COM(2022) 216 final} - {SEC(2022) 204 final} - {SWD(2022) 145 final} - {SWD(2022) 146 final}  
 
 
Subsidiarity Grid 

1.  Can the Union act? What is the legal basis and competence of the Unions’ intended action? 

1.1 Which article(s) of the Treaty are used to support the legislative proposal or policy initiative? 

The legal basis for the intended action is Article 115 of the Treaty on the Functioning of the 
European Union (TFEU) on the approximation of laws of the Member States, which directly 
affect the establishment or functioning of the internal market. Although the provision does 
not mention direct taxation explicitly, this Article has consistently been used to date as the 
standard legal base for legislative initiatives with harmonisation objectives in direct taxation. 
The  rule  explicitly  prescribes  that  the  only  legal  instrument  which  can  be  used  under  this 
legal base is a Directive. 

1.2 Is the Union competence represented by this Treaty article exclusive, shared or supporting in 
nature? 

The Union competence represented by this Treaty article is shared between the Commission 
and Member States pursuant to Article 4 (2) (a) Internal Market of the TFEU. 

Subsidiarity does not apply for policy areas where the Union has exclusive competence as defined in 
Article  3  TFEU1.  It  is  the  specific  legal  basis  which  determines  whether  the  proposal  falls  under  the 
subsidiarity  control  mechanism.  Article  4  TFEU2  sets  out  the  areas  where  competence  is  shared 
between the Union and the Member States. Article 6 TFEU3 sets out the areas for which the Unions 
has competence only to support the actions of the Member States. 

2.  Subsidiarity Principle: Why should the EU act? 

2.1 Does the proposal fulfil the procedural requirements of Protocol No. 24: 

-  Has there been a wide consultation before proposing the act? 

Before proposing this act, stakeholder feedback has been requested and obtained through a 
wide range of activities. In particular: 

(i) 

(ii) 

Inception 

In  the  context  of  the 
Impact  Assessment,  feedback  from  seven 
stakeholders  was  uploaded  in  Have-your-say  from  14/06/2021  to  12/07/2021:  one 
investment  group,  five  business  associations  (one  of  which  from  UK),  one  Polish 
citizen.   
A  public  consultation  ran  from  1/07/2021  until  7/10/2021.  Overall,  67  responses 

1 https://eur-lex.europa.eu/legal-content/EN/TXT/HTML/?uri=CELEX:12008E003&from=EN  
2 https://eur-lex.europa.eu/legal-content/EN/TXT/HTML/?uri=CELEX:12008E004&from=EN  
3 https://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=CELEX:12008E006:EN:HTML  
4 https://eur-lex.europa.eu/legal-content/EN/TXT/HTML/?uri=CELEX:12016E/PRO/02&from=EN  

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were  received:  37  business  associations mainly  representing  financial organisations 
of  all  sizes  (including  SMEs),  12  companies/business  organisations  (mostly  tax 
accountant  and  financial  organisations),  3  academic  and  research  institutions  ,  8 
NGOs  or others  (mostly  Chambers of  Commerce, stock exchanges) and 7 individual 
citizens.  Most  respondents  came  from  either  Belgium  (14/67),  Germany  (14/67)  or 
France (12/67).  A total of 30 position papers have been uploaded.  

(iii) 
(iv) 

(v) 

Bilateral meetings were organised with business associations.   
A  meeting  with  national  tax  authorities/agencies,  business  associations  and  civil  society 
groups took  place  in the  context of the Commission Experts  Group “Platform for Tax Good 
Governance, Aggressive Tax Planning and Double Taxation”.   
A meeting took place with the European Economic and Social Committee (EESC). 

- 

Is  there  a  detailed  statement  with  qualitative  and,  where  possible,  quantitative  indicators 
allowing an appraisal of whether the action can best be achieved at Union level? 

The explanatory memorandum of the act contains a statement that the proposal ensures the 
principle of subsidiarity. 

2.2 Does  the  explanatory  memorandum  (and  any 

impact  assessment)  accompanying  the 
Commission’s  proposal  contain  an  adequate  justification  regarding  the  conformity  with  the 
principle of subsidiarity? 

 Statement on subsidiarity included in the explanatory memorandum:   

This proposal complies with the principle of subsidiarity. The nature of the subject requires a 
common initiative across the internal market. 

The rules of this Directive aim to tackle the debt-equity bias in the EU corporate sector from 
a tax perspective and provide a common framework to be implemented into Member States' 
national  laws  in  a  coordinated  manner.  Such  aims  cannot  be  achieved  in  a  satisfactory 
manner  through  action  undertaken  by  each  Member  State  while  acting  on  its  own  and 
without coordination with the others. 

Tax debt-equity bias arises from the different treatment of debt  and equity financing costs 
for  tax  purposes  and  is  a  problem  common  to  businesses  across  all  EU  Member  States. 
Despite  this,  only  six  Member  States  have  taken  tax  measures  to  approximate  the  tax 
treatment of debt and equity. What is more, although there is soft law guidance for this type 
of tax incentives, the relevant national measures of the six Member States vary significantly 
in terms of design elements and anti-tax avoidance rules.  

The complete lack of measures  that mitigate tax debt bias in 21 Member States along with 
the existence of significantly different measures in 6 Member States may create distortions 
to the functioning of the internal market and affect the location of investment in a significant 
manner. In addition, it may give rise to loopholes across the single market and create a risk of 
aggressive tax planning.  

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Furthermore, an EU initiative would add value, as compared to what a multitude of actions 
taken at national level can attain. A single rule for the EU will allow reducing compliance and 
administrative costs: on the one hand, taxpayers will need to comply with a single rule for all 
their operations in the single market; on the other, Member States’ tax administrations will 
need to consider only one rule for all taxpayers’ operations, instead of a fragmented system 
of  rules.  An  EU-wide  rule  is  also  expected  to  boost  competition  in  the  single  market  by 
ensuring  that  all  businesses,  regardless  of  where  they  are  located,  have  similar  incentives 
towards sustainable financing.  

An EU-wide initiative  in the  form of a binding legislative proposal is therefore necessary to 
address a problem that is common across the EU in a coordinated and effective manner. An 
EU  initiative  would  prevent  potential  loopholes  between  diverging  national  initiatives  and 
would ensure that location of business and investment are not adversely impacted. 

2.3 Based  on  the  answers  to  the  questions  below,  can  the  objectives  of  the  proposed  action  be 

achieved sufficiently by the Member States acting alone (necessity for EU action)? 

Member  States  acting  alone  would  not  be  able  to  sufficiently  achieve  the  objectives  of 
addressing the tax debt bias across the EU corporate sector.  The problem is not confined to 
a single Member State or a group of Member States, but affects all of them. In addition, the 
combination of some Member States operating divergent national rules with a complete lack 
of  rules  in  other  Member  States  can  create  distortions  and  undermine  competition  in  the 
single market.  

(a)  Are  there  significant/appreciable  transnational/cross-border  aspects  to  the  problems  being 

tackled? Have these been quantified? 

There are significant cross-border aspects to the problem, which affect the functioning of the 
internal market. It is in this context that the Code of Conduct Group (Business Taxation) has 
scrutinised the relevant national measures.  

The  problem  is  common  to  all  EU  Member  States,  but  only  a  few  of  them  have  taken  tax 
measures to tackle it. These measures pertain to the tax treatment of equity financing and as 
such  can  affect  the  location  of  business  in  the  single  market.  A  patchwork  of  different 
national rules per jurisdiction combined with no rules at all in some jurisdictions across the 
single  market  can  distort  decisions  on  the  location  of  business,  while  also  creating  a 
compliance burden for businesses operating cross-border.  

These aspects have not been quantified. 

(b)  Would national action or the absence of the EU level action conflict with core objectives of 

the Treaty5 or significantly damage the interests of other Member States? 

5 https://europa.eu/european-union/about-eu/eu-in-brief_en  

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The  absence  of  EU  level  action  in  tackling  tax  debt  bias  by  balancing  the  tax  treatment  of 
equity  and  debt  financing  could  undermine  /  continue  undermining  the  functioning  of  the 
internal market.  

Member  States  have  taken  divergent  or  no  actions  to  tackle  the  problem  and  the 
mismatches  amongst  them  lead  to  loopholes,  allowing  abuse  and  risking  to  affect  the 
location of business in a non-optimal manner.  

Moreover,  multinational  groups  incur  significant  administrative  burdens  when  complying 
with a proliferation of similar, yet different, national measures targeting the same issue.  

(c)  To  what  extent  do  Member  States  have  the  ability  or  possibility  to  enact  appropriate 

measures? 

Member  States  have  the  possibility  to  enact  measures  to  tackle  tax  debt  bias  in  their 
jurisdictions.  Nevertheless,  if  a  Member  State  enacts  such  measures  without  coordinating 
with  other  Member  States,  it  may  create  room  for  harmful  tax  practices,  by  attracting  the 
location of business for purely tax motives. The problem intensifies if several Member States 
take measures that are not coordinated.  

(d)  How  does  the  problem  and  its  causes  (e.g.  negative  externalities,  spill-over  effects)  vary 

across the national, regional and local levels of the EU? 

The problem of the debt-equity bias varies across countries due to differences in corporate 
income  tax  and  interest  rates,  which  drive  the  debt-equity  bias.  Calculations  of  the  debt-
equity bias indicate that it is more pronounced in some Member States while it is absent in 
the Member States that operate a domestic equity allowance mechanism. Debt-equity ratios 
of  non-financial  corporations,  which  are  in  part  determined  by  the  debt-equity  bias,  differ 
considerably across the EU, ranging from 0.36 to almost 1.04.  

DEBRA seeks to create a level playing field across the EU by ensuring that all EU businesses 
are treated equally in terms of taxation concerning their financing choices and regardless of 
how they choose to finance themselves, i.e. through equity or debt instruments. As a result, 
the location of business within the single market should not be a relevant factor affecting the 
tax treatment of financing costs.  

(e)  Is the problem widespread across the EU or limited to a few Member States? 

The  problem  that  this  initiative  targets,  different  treatment  of  debt  and  equity  financing 
instruments for tax  purposes,  is widespread in the EU, with only six Member States having 
taken  measures  to  address  it.  The  existence  of  few  national  measures  in  this  regard  can 
create  distortions  in  the  single  market  and  open  loopholes  that  can  be  exploited  for  tax 
planning purposes.  

(f)  Are Member States overstretched in achieving the objectives of the planned measure? 

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Member States will not be overstretched to achieve the objectives of the planned measure. 
The  initiative  will  require  very  limited  additional  human  resources  from  national  tax 
authorities to comply with the planned action.  In addition, the measure is designed to have 
very  limited  impact  on  Member  States’  budgets,  while  helping  the  re-capitalisation  of  EU 
business.  

(g)  How  do  the  views/preferred  courses  of  action  of  national,  regional  and  local  authorities 

differ across the EU? 

Currently only six Member States have taken action to address the problem of tax debt bias 
at national level. To the contrary, 21 Member States have taken no relevant measures. One 
Member State has considered introducing a relevant measure but concluded that measures 
at individual Member State level entail risks of abuse and only an EU-wide approach can be 
effective. 

Amongst the six Member States that have relevant measures, the policy reasons behind their 
introduction  vary,  as  do  key  design  elements.    In  particular,  such  measures  have  been 
introduced to attract investment, or to address specific needs of undercapitalisation of local 
companies, including mainly family businesses. A common element of the different domestic 
rules is the weight attached to the anti-abuse framework.  

Those Member States that do not have in place such measures may be applying a very low 
statutory  corporate  income  tax  (CIT)  rate,  which  in  principle  allows  to  alleviate  the  debt-
equity bias.  

Nevertheless, Member  States agree  in principle on the  cross-border nature of the problem 
and the potentially harmful effects that domestic measures may cause to the internal market 
if they create a fragmented framework in the EU. This is the reason why relevant measures at 
national level fall within the scope of the Code of Conduct Group (Business Taxation). 

2.4 Based  on  the  answer  to  the  questions  below,  can  the  objectives  of  the  proposed  action  be 
better achieved at Union level by reason of scale or effects of that action (EU added value)? 

The EU action will keep compliance costs to a minimum, as businesses will need to adhere to 
a  single  set  of  rules,  rather  than  different  national  measures,  to  tackle  tax  debt  bias.  A 
common policy approach will provide taxpayers with tax certainty, close loopholes used for 
tax avoidance and reduce compliance costs for cross-border business.  

(a)  Are there clear benefits from EU level action?  

initiative  would  add  value,  as  compared  to  what  a  multitude  of  national 
An  EU 
implementation  methods  can  attain.  A  single  rule  for  the  EU  will  reduce  compliance  and 
administrative  costs,  for  both  taxpayers  and  tax  administrations.  An  EU-wide  rule  is  also 
expected  to  boost  competition  in  the  single  market  by  ensuring  that  all  businesses, 
regardless of where they are located, have similar incentives towards sustainable financing.  

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(b)  Are there economies of scale? Can the objectives be met more efficiently at EU level (larger 

benefits per unit cost)? Will the functioning of the internal market be improved? 

An EU action would keep compliance costs to a minimum, as businesses will need to adhere 
to a single set of national measures, to address the tax debt bias. For a group active across 
the EU, there will be gains in terms of economies of scale, as all of its entities, no matter in 
which  Member  State  they  are  resident  for  tax  purposes,  will  follow  a  single  set  of 
requirements. In the same vein, given that this measure aims at strengthening capitalisation 
and hence the resilience of companies, it is useful that it applies equally to all companies of a 
cross-border group. 

The  current  measure  is  closely  linked  with  the  actions  towards  completing  the  capital 
markets  union.  The  mitigation  of  the  debt-equity  bias  incentivises  the  use  of  equity.  This 
complementary effect  can  only  be  fully  realised  if  the  measure  is  applied  across  the entire 
internal market.  

In  the  EU,  a  market  of  highly  integrated  economies,  there  is  a  need  for  common  strategic 
approaches  and  coordinated  action,  to  improve  the  functioning of the  internal  market  and 
maximise  the  positive  impact  of  mitigating  tax  debt  bias.  This  can  only  be  achieved  if 
legislation  is  prescribed  centrally  and  transposed  in  a  uniform  fashion.  In  fact,  similar 
measures being in place across the EU as regards tax treatment of debt and equity, location 
of business may be determined in an optimal way and competition can be enhanced, since all 
EU businesses will be enjoying the same treatment. 

(c)  What  are  the  benefits  in  replacing  different  national  policies  and  rules  with  a  more 

homogenous policy approach? 

Different  national  policies  lead  to  mismatches  across  the  single  market  that  cross-border 
business  can  exploit  to gain unintended tax benefits.  One single policy  could  eliminate this 
risk. In addition, one single policy can support competition in the single market by ensuring 
that all EU business, regardless of location, enjoy similar treatment in tax terms.  

In  addition,  a  common  policy  approach  will  provide  taxpayers  with  tax  certainty,  reduce 
compliance costs and close loopholes used for tax avoidance.  

(d)  Do  the  benefits  of  EU-level  action outweigh  the  loss of  competence  of  the  Member  States 
and  the  local and  regional  authorities  (beyond  the  costs  and  benefits of  acting  at  national, 
regional and local levels)? 

The  competence  of  Member  States  in  tax  matters  is  maintained  as  this  proposal  is 
complementary  and  contributes  to  the  effectiveness  of  existing  national and  EU  measures. 
While the EU action sets a uniform and coordinated approach to the deductibility of equity 
and debt financing costs, Member States remain free to design their own tax systems, as well 
as to determine the level of their corporate income tax rates.  

(e)  Will there be improved legal clarity for those having to implement the legislation? 

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The EU action will ensure that the measures are enacted according to the acquis and follow a 
common  line  across  the  Union.  As  such  the  EU  Action  can  provide  taxpayers  with  legal 
certainty  that  the  new  legal  framework  is  compatible  with  the  EU  fundamental  freedoms, 
including the freedom of establishment. 

3.  Proportionality: How the EU should act 

3.1  Does  the  explanatory  memorandum  (and  any  impact  assessment)  accompanying  the 
Commission’s proposal contain an adequate justification regarding the proportionality of the 
proposal  and  a  statement  allowing  appraisal  of  the  compliance  of  the  proposal  with  the 
principle of proportionality? 

Statement on proportionality to be included in the explanatory memorandum:   

The  envisaged  measures  do  not  go  beyond  ensuring  the  minimum  necessary  level  of 
protection  for  the  internal  market.  The  Directive  does  not  therefore  prescribe  full 
harmonization but only a specific tax measure to address a common EU-wide problem.  

In particular, the Directive lays down a rule to provide, across the EU and for all EU taxpayers, 
for  the  deductibility  of  an  allowance  on  equity  financing  costs  complemented  by  a 
proportionate  rule  to  limit  the  deductibility  of  interest  on  debt  financing  instruments.  The 
Directive  also  ensures  the  sustainability  of  the  measures  for  Member  States’  budgets  by 
virtue of a general rule that limits the deductibility of financing costs from taxpayers’ taxable 
base  to  a  proportionate  amount.  By  setting  a  common  EU-wide  framework,  the  Directive 
allows  legal  certainty  across  the  single  market  and  the  reduction  of  compliance  costs  for 
taxpayers.  

Thus, the Directive ensures only the essential degree of coordination within the Union for the 
purpose  of  materializing  its  aims.  In  this  light,  the  proposal  does  not  go  beyond  what  is 
necessary  to  achieve  its  objectives  and  is  therefore  compliant  with  the  principle  of 
proportionality. 

3.2 Based  on  the  answers  to  the  questions  below  and  information  available  from  any  impact 
assessment,  the  explanatory  memorandum  or  other  sources,  is  the  proposed  action  an 
appropriate way to achieve the intended objectives? 

The  DEBRA  proposal  aims  for  a  proportionate  solution,  as  Member  States  remain  free  to 
determine  their  own  tax  systems,  including  tax  residence  rules  and  the  level  of  their 
corporate  income  tax  rates.  The  new  rules  will  merely  ensure  that  all  Member  States 
recognise the deductibility of financing costs in a balanced manner for both equity and debt 
and do so within specific limits in order to keep a neutral impact on their budgets.  

(a)  Is the initiative limited to those aspects that Member States cannot achieve satisfactorily on 

their own, and where the Union can do better? 

This initiative is limited to providing Member States with tools to address an issue that they 

7 

 
 
cannot satisfactorily address on their own. Non-coordinated policies on the tax treatment of 
debt  and  equity  financing  costs  create  loopholes  across  the  single  market  and  hence  tax 
abuse  opportunities.  They  also  entail  risks  to  increase  disproportionately  budget  costs  for 
certain  Member  States  over  others.  An  aligned  approach  eliminates  loopholes  and 
mismatches and ensures proportionate distribution of costs across the EU.  

(b)  Is  the  form  of  Union  action  (choice  of  instrument)  justified,  as  simple  as  possible,  and 
coherent with the satisfactory achievement of, and ensuring compliance with the objectives 
pursued  (e.g.  choice  between  regulation,  (framework)  directive,  recommendation,  or 
alternative regulatory methods such as co-legislation, etc.)? 

In order to ensure a consistent application of the rules within the EU and compatibility with 
EU  law,  the  principal  method  for  implementing  the  measures  in  the  EU  will  be  by  way  of 
binding  law.  A  Directive  can  provide  a  common  framework  for  implementing  measures  to 
tackle tax debt bias into Member States' national laws in a coordinated manner and adjusted 
for  EU  law  requirements.  Most  importantly,  this  is  the  only  legal  instrument  mentioned  in 
the legal base of Article 115 TFEU, which is the base used for direct taxation. 

(c)  Does the Union action leave as much scope for national decision as possible while achieving 
satisfactorily the objectives set? (e.g. is it possible to limit the European action to minimum 
standards or use a less stringent policy instrument of approach?) 

Yes,  the  proposal  is  limited  to  establishing  a  similar  tax  treatment  of  equity  and  debt 
financing  costs,  i.e.  their  proportionate  deductibility.  The  EU  action  will  be  through  a 
proposal for a directive, the adoption of which requires unanimity in the Council. In addition, 
the  proposed  rules  do  not  impair  Member  States’  tax  sovereignty  as  Member  States  will 
remain free to determine the details of their corporate tax systems, including the rate. 

(d)  Does  the 

initiative  create  financial  or  administrative  cost  for  the  Union,  national 
governments,  regional or local authorities, economic operators or citizens? Are these costs 
commensurate with the objective to be achieved? 

The  initiative  will  create  some  additional  administrative  costs  for  national  tax  authorities. 
These  costs  will  be  linked  to  implementing  the  initiative  and  complying  with  measures 
provided  by  the  initiative, in  particular  to  tackle  any potential  abuse.  The  initiative  has  the 
potential  to  create  some  limited  short-term  fiscal  costs.  In  the  long  term,  though,  the 
additional  growth  potential  is  expected  to  overcompensate  for  these  costs,  by  boosting 
competitiveness  of  the  EU  single  market  and  ultimately  potentially  even  contributing  to 
Member States’ tax revenues.  

There will also be some additional administrative costs for taxpayers. However, the taxpayers 
who  operate  cross-border  will  benefit  from  the  minimizing  the  compliance  costs  that  arise 
from fragmented legislation.  

(e)  While  respecting  the  Union  law,  have  special  circumstances  applying  in  individual  Member 

States been taken into account? 

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Not applicable.  

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