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  COM(2022) 216 final 2022/0154 (CNS)  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 {SEC(2022) 204 final} - {SWD(2022) 144 final} - {SWD(2022) 145 final} - {SWD(2022) 146 final}  
 
EXPLANATORY MEMORANDUM 

1. 

• 

CONTEXT OF THE PROPOSAL 

Reasons for and objectives of the proposal 

On 18 May 2021, the European Commission adopted a Communication on Business Taxation 
for the 21st century1 to promote a robust, efficient and fair business tax system in the EU. It 
sets  out  both  a  long-term  and  short-term  vision  to  support  Europe's  recovery  from  the 
COVID-19 pandemic and to  ensure  adequate public revenues over the coming  years.  In the 
same vein, the EU’s Capital Markets Union Action Plan (CMU)2 aims at helping companies 
to raise the capital they need and improve their equity position, especially during a recovery 
period implying higher deficits and debt levels, as well a greater need for equity investment. 
In particular, Action 4 of the CMU  3 incentivises institutional investors to make more long-
term  investments  and  thus  supports  re-equitisation  in  the  corporate  sector,  with  a  view  to 
fostering the sustainable and digital transition of the EU economy. An initiative at EU level to 
address the debt-equity bias complements the aforementioned Action 4, with the aim to create 
an  equitable  and  stable  business  environment,  which  can  boost  a  sustainable  and  job-rich 
growth in the Union. 

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  in  tax  treatment  is  one  of  the 
factors  favouring  the  use  of  debt  over  equity  for  financing  investments.  Currently,  only  6 
Member States address the debt-equity bias from a tax perspective and the relevant national 
measures  differ  significantly.  Unless  the  tax-induced  debt-equity  bias  is  effectively  tackled 
across  the  single  market,  EU  business  will  continue  to  have  insufficient  incentives  towards 
equity  over  debt  financing  and  relevant  tax  planning  considerations  will  continue  distorting 
distribution of investment and growth.  

With  a  view  to  addressing  the  tax-induced  debt-equity  bias  across  the  single  market  in  a 
coordinated way,  this directive  lays  down rules to provide, under certain  conditions,  for the 
deductibility for tax  purposes  of notional  interest  on increases in  equity  and to  limit  the tax 
deductibility  of  exceeding  borrowing  costs.  It  applies  to  all  taxpayers  that  are  subject  to 
corporate tax in one or more Member State, except for financial undertakings. Since small and 
medium enterprises (SMEs) usually face a higher burden to obtain financing, it is proposed to 
grant a higher notional interest rate to SMEs.  

This  proposal  also  replies  to  the  European  Parliament’s  expectation  that  the  Commission 
would  put  forth  a  proposal  for  a  debt-equity  bias  reduction  allowance,  including  effective 
anti-avoidance provisions to avoid any allowance on equity being used as a new tool for base 
erosion4. 

1 

2 

3 

4 

Communication  From  The  Commission  To  The  European  Parliament  And  The  Council,  Business 
Taxation for the 21st Century, COM(2021) 251 final. 
Communication  From  The  Commission  To  The  European  Parliament,  The  Council,  The  European 
Economic And Social Committee And The Committee Of The Regions, A Capital Markets Union for 
people and businesses-new action plan, COM/2020/590 final.  
Action 4 - Encouraging more long-term and equity financing from institutional investors | European Commission 
(europa.eu) 
Report  on 
https://www.europarl.europa.eu/doceo/document/A-9-2021-0348_EN.html  

impact  of  national 

the  EU  economy, 

(2021/2074(INI)) 

reforms  on 

tax 

the 

EN 

1 

  EN 

                                                 
• 

Consistency with existing and possible future provisions in the policy area 

This Directive is part of the EU strategy on business taxation, which aims to ensure a fair and 
efficient tax system across the EU.  
In  2016,  the  anti-tax  avoidance  directive  (ATAD)5  was  adopted  to  ensure  a  fairer  tax 
environment  through  the  coordinated  implementation  in  Member  States  of  key  measures 
against  tax  avoidance  that  mostly  stemmed  from  the  international  Base  Erosion  and  Profit 
Shifting (BEPS) project actions. While the fight against tax avoidance is not its predominant 
purpose,  this  proposal  also  includes  an  interest  limitation  rule.  In  light  of  the  different 
objectives between this  proposal and the ATAD rule on interest limitation, the two rules on 
limiting the deductibility of interest should apply in parallel.  

Existing tax instruments at EU level do not contain, however, measures to address the debt-
equity bias in the single market by balancing the tax treatment of debt and equity across the 
EU. 

This Directive follows up to the Commission’s Communication on Business Taxation for the 
21st century for a robust, efficient and fair business tax system in the EU and reflects one of 
the policy initiatives envisaged in such Communication. As such, it complements a number of 
other policy initiatives promoted by the Commission in parallel, in the short- and long-term.  

The aforementioned policy initiatives include a proposal for Business in Europe: Framework 
for Income Taxation (BEFIT), as a single corporate tax rulebook for the EU, based on the key 
features of having a common tax base and allocating profits between Member States through 
methods that include a formula (formulary apportionment). While the BEFIT proposal is still 
in  an early stage of development,  the two initiatives contribute to  the same vision of a fair, 
effective and sustainable business environment in the EU. 

• 

Consistency with other Union policies 

This  proposal  contributes  to  the  Capital  Markets  Union.  In  particular,  key  objectives  of  the 
CMU are to render financing more accessible to EU business and to promote the integration 
of national capital markets into a genuine single market. By removing the tax-induced debt-
equity bias, this proposal is aimed at avoiding over-reliance on debt and encouraging the re-
equitisation of businesses. As a result, companies will be in a better position to invest for the 
future, which will support growth and innovation and support the competitiveness of the EU 
economy.  This  will  also  increase  their  resilience  to  unforeseen  changes  in  the  business 
environment  and  decrease  the  risk  of  insolvency,  thus  contributing  to  enhancing  financial 
stability. 

2. 

• 

LEGAL BASIS, SUBSIDIARITY AND PROPORTIONALITY 

Legal basis 

Direct tax legislation falls within the ambit of Article 115 of the Treaty on the Functioning of 
the EU (TFEU). The clause stipulates that legal measures of approximation under that article 
shall take the legal form of a Directive. 

5 

Council Directive (EU) 2016/1164 of 12 July 2016 laying  down rules against tax avoidance practices 
that directly affect the functioning of the internal market (OJ L 193, 19.7.2016, p. 1). 

EN 

2 

  EN 

 
                                                 
• 

Subsidiarity (for non-exclusive competence)  

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. 

Tax debt-equity bias arises from the different treatment of debt and equity financing costs for 
tax purposes and is  a problem common to  business  across EU Member States. Despite this, 
only 6 Member States have taken tax measures to approximate the tax treatment of debt and 
equity.  Although  there  is  soft  law  guidance6  for  this  type  of  tax  incentives  by  the  Code  of 
Conduct Group (Business Taxation), the relevant national measures of the  6 Member States 
differ in terms of design elements and anti-tax avoidance rules, especially given the different 
circumstances and the different policy goals pursued in each Member State. 

The complete lack of relevant tax debt bias mitigating measures in 21 Member States along 
with the existence of significantly different measures in another 6 Member States may create 
distortions to the function of the internal market and can affect the location of investment in a 
significant manner.  

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  ensure  legal  certainty  and 
allow reducing compliance costs for business as taxpayers will need to comply with a single 
rule for all their operations in the single market. 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 appropriate financing. 

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

• 

Proportionality 

The  envisaged  measures  do  not  go  beyond  ensuring  the  minimum  necessary  level  of 
protection  for  the  internal  market.  The  Directive  lays  down  rules  to  provide,  across  the  EU 
and  for  all  EU  taxpayers,  for  the  deductibility  of  an  allowance  on  equity  financing  costs 
complemented  by  a  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.  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. 

6 

WK 11093/2019 REV 1 

EN 

3 

  EN 

                                                 
• 

Choice of the instrument 

The proposal is for a Directive, which is the only available instrument under the legal base of 
Article 115 TFEU. 

3. 

• 

RESULTS 
CONSULTATIONS AND IMPACT ASSESSMENTS 

EX-POST 

EVALUATIONS, 

OF 

STAKEHOLDER 

Ex-post evaluations/fitness checks of existing legislation 

There  is  no  EU  legislation  addressing  the  debt-equity  bias.  Therefore,  evaluation  is  not 
relevant. 

• 

Stakeholder consultations 

On 1 July 2021, TAXUD launched a public consultation on a potential initiative to  address 
the  debt-equity  bias.  It  contained  a  variety  of  questions  aimed,  inter  alia,  at  delineating  the 
problem and its drivers and identifying the appropriate form of EU action and the key features 
of a possible measure. The consultation closed on 7 October 2021 with a total of 67 replies.  

The respondents were 37 business associations mainly representing financial organisations of 
all  sizes  (including  SME),  12  companies/business  organisations  (mostly  tax  accountant  and 
financial  organisations),  3  academic  and  research  institutions,  8  NGOs  or  others  (mostly 
chamber  of  commerce,  stock  exchanges)  and  7  individual  citizens.  Most  respondents  came 
from either Belgium (14/67), Germany (14/67) or France (12/67). 

NGOs and academics are of the view that the main reason companies use debt is to decrease 
their tax liability and avoid dilution of their shareholders, whereas business associations and 
companies consider that it is the necessity of finding financing means. 

A  majority  of  respondents,  among  them  100%  of  academics,  86%  of  citizens,  50%  of 
corporations  and  42%  of  business  associations,  find  that  an  EU  initiative  to  address  the  tax 
debt-equity  bias  would  be  a  useful  tool  to  support  the  recovery  of  companies  from  the 
COVID-19  crisis  and  incentivise  investment  through  equity  in  the  transition  to  a  greener 
digitalised economy without creating distortions in the single market. Companies, NGOs and 
academics strongly think firms should be encouraged, amongst others from a tax perspective, 
to use more equity and less debt. 

Business  associations,  companies  and  academics  clearly  agree  that  such  an  initiative  will 
reduce  the  room  for  harmful  tax  practices  in  the  single  market.  Importantly,  a  majority  of 
respondents, among them 71% of corporations, 66% of academics, 43% of citizens and 28% 
of  business  associations,  think  that  an  EU  initiative  would  be  beneficial  for  enterprises 
operating across the single market. 

On  the  different  options,  a  majority  of  respondents  are  very  negative  on  the  option  of 
suppressing  completely  interest  deductibility,  among  them  75%  of  corporations,  72%  of 
business associations, 71% of citizens and 66% of academics find it the least suitable option 
and  a  majority  is  quite  negative  about  the  option  for  an  allowance  on  corporate  financial 
capital that would replace the tax deduction of interest. It was considered the best option only 
by 16% of corporations,  14% of citizens, 5% of business associations and no  academic. On 
the contrary,  a majority  of  respondents  are  favourable to  an  allowance that  provides  for the 
deductibility  of  a  notional  interest  on  new  equity  (while  maintaining  the  existing  interest 
deductibility). It appears the best option for 66% of academics, 28% of business associations, 
25% of corporations and 14% of citizens. Business associations and companies are even more 

EN 

4 

  EN 

favourable  to  the  option  of  having  an  allowance  on  the  stock  of  equity,  while  NGOs  and 
academics are less favourable to this option. 

Finally, a majority of respondents to this point strongly agree that the initiative should come 
with  robust  rules  to  avoid  aggressive  tax  planning  practices,  among  them  71%  of  citizens, 
66% of academics, 42% of business associations and 33% of corporations. 

In designing its proposal, the Commission took into account the results of the consultation. In 
particular,  amongst  the  various  policy  options,  the  Commission  decided  to  proceed  with  a 
proposal  to  give  an  allowance  only  to  new  equity  and  not  to  consider  eliminating  all 
deductibility of debt. Furthermore, the directive provides a robust anti-abuse framework as the 
need has been highlighted by the respondents. 

In  addition,  the  Commission  appreciates  that  the  protection  of  Member  States’  taxable 
revenues  is  essential  to  ensure  a  sustainable  economy  and  safeguard  public  finances  during 
the ongoing recovery period after the pandemic. Consequently, the Commission proposes to 
mitigate the debt-equity bias through measures addressing both the equity and the debt sides, 
combining an allowance for new equity with a limitation to the deductibility of debt costs.  

• 

Collection and use of expertise 

In identifying appropriate measures to  tackle the  debt-equity bias, the Commission  drew on 
the  relevant  expertise  of  Member  States  that  have  already  put  in  place  similar  measures 
(Belgium, Portugal, Poland, Cyprus, Malta and Italy). The Commission undertook exchanges 
with  some  of  the  relevant  tax  administrations  on  the  anti-abuse  framework  and  to  better 
understand the impact in terms of costs and benefits of the various measures.  

The Commission met with national public authorities/agencies, business associations and civil 
society  groups  that  participate  in  the  Commission  Expert  Group  “Platform  for  Tax  Good 
Governance,  Aggressive  Tax  Planning  and  Double  Taxation”.  The  Commission  also  had 
exchanges with the European Economic and Social Committee (EESC). 

• 

Impact assessment 

An impact assessment was carried out to prepare this initiative. 

On  17  March  2022  the  Regulatory  Scrutiny  Board  (RSB)  issued  a  positive  opinion  with 
reservations  on  the  submitted  impact  assessment  regarding  this  proposal,  including  several 
suggestions for improvement.7 The Impact Assessment report (IA) was further revised along 
these  lines,  as  explained  below.  The  IA  examines  five  policy  options  in  addition  to  the 
baseline scenario, i.e. no action.  

Option 1 would introduce an allowance on the stock of corporate equity indefinitely, whereas 
Option 2 would also introduce an allowance but only for new equity and for ten years.  

Option  3  would  envisage  an  allowance  on  corporate  capital  (i.e.  equity  and  debt)  while 
disallowing  current  deductibility  of  interest  payments  and  Option  4  would  completely 
disallow  the  deductibility  of  interest  expenses.  Option  5  would  combine  an  allowance  for 
notional  interest  on  new  corporate  equity  (same  as  proposed  under  Option  2)  for  ten  years 
with a partial limitation of tax deductibility for all companies. 

7 

[Please  insert  the  links  to  the  summary  sheet  and  the  positive  opinion  of  the  RSB  after  their 
publication.] 

EN 

5 

  EN 

                                                 
A rate top-up for SMEs8 would be applied in all cases outlined under policy options 1, 2, 3 
and 5.. 

The  various  Options  have  been  compared  against  the  following  criteria:  a)  Making  the  tax 
system  neutral  for  financing  decisions,  b)  Enhancing  the  fairness  of  the  tax  system,  c) 
Reducing  distortions  in  the  single  market  and  d)  Stimulating  growth  and  investment  in  the 
EU. The comparison revealed that Options 1, 2, 3 and 4 can be expected to be to some degree 
effective  in  meeting  some  of  the  objectives  of  this  initiative.  However,  Option  5  is  the 
preferred  option,  because  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. 

Economic impacts 

For  the  assessment  of  the  economic  impacts  the  modelling  was  done  by  the  European 
Commission’s Joint Research Centre based on the CORTAX model.  

Benefits 

The  preferred  option  (Option  5)  is  expected  to  have  a  positive  economic  impact.  As  main 
direct benefit, it will favour higher equity ratios and so reduce insolvency risks. By increasing 
equity  investments  across  the  EU,  this  option  is  expected  to  indirectly  promote  the 
development  of  innovative  technology.  Equity  is  particularly  important  for  fast-growing 
innovative  companies  in  their  early  stages  and  scale-ups  willing  to  compete  globally.  The 
green and digital transition requires new and innovative investments that will benefit from the 
measure.  By  benefiting  from  a  higher  notional  interest  rate,  SMEs  will  have  an  increased 
access  to  the  equity  market.  Positive  effects  on  competitiveness,  innovation,  growth  and 
employment in the EU are expected. It will also tackle fragmentation of the single market by 
eliminating  different  treatment  under  different  national  allowance  for  equity  measures  and 
providing same administrative rules in all EU Member States. Finally, it will provide uniform 
and effective measures against aggressive tax planning in the EU. 

Costs 

The  costs  related  to  the  selected  option  are  essentially  an  increase  in  compliance  costs  for 
businesses  and  tax  administrations.  Tax  compliance  costs  for  business  are  expected  to 
increase in a limited manner. Overall, costs should be relatively limited because the additional 
data to be reported to benefit from the allowance should be relatively simple to provide. For 
tax  administrations,  costs  are  also  expected  to  increase  modestly.  This  proposal  does  not 
significantly increase compliance burden for firms or for tax administrations. 

Main changes implemented 

The RSB issued a positive opinion with reservations on the IA. In particular, it was noted that 
IA should better highlight how the preferred option best achieves the objectives. Furthermore, 
the RSB noted that the IA should be enhanced as regards the possibility to use non regulatory 
measures  and  should  better  reflect  the  different  stakeholder  views  throughout  the  main 
analysis and annexes. Annex I to the Impact Assessment explains how the RSB reservations 

8 

SMEs  would  be  defined  as  per  Article  3  of  the  Accounting  Directive  2013/34/EU  of  the  European 
Parliament and of the Council of 26 June 2013. In addition it would be required that for a company to 
be considered a SME, it must not be part of a group of businesses which, at consolidated level, exceeds 
at  least  two  of  the  three  limits  of  Article  3  under  the  Accounting  Directive  (Average  number  of 
employees  in  the  fiscal  year  250;  net  turnover  of  EUR  40  million;  balance  sheet  total  of  EUR  20 
million). 

EN 

6 

  EN 

                                                 
were addressed. Several parts of the IA were revised. First, the IA has been revised in order to 
clarify that a non-regulatory option could not be effective Second, the IA has been expanded 
in order to reflect in detail the scale of anticipated effects on equity investment and the impact 
of  the  preferred  option  on  tax  revenues  in  absolute  terms.  The  IA  was  also  enhanced  with 
further analysis of the reasons why an option acting both on the equity and debt sides has been 
considered as fit for purpose. Third, several sections of the main part of the IA were revised in 
order  to  include  relevant  stakeholder  input,  gathered  through  the  open  public  consultation 
procedure.  

4. 

BUDGETARY IMPLICATIONS 

See Legislative Financial Statement. 

5. 

• 

OTHER ELEMENTS 

Implementation plans and monitoring, evaluation and reporting arrangements 

This proposal, once adopted as a Directive, should be transposed into Member States’ national 
law  by  31  December  2023  and  come  into  effect  as  of  1  January  2024.  For  the  purpose  of 
monitoring and evaluation of the implementation of the Directive, Member States will have to 
provide the Commission, on a yearly basis, with relevant information per tax year, including a 
list of statistical data. The relevant information is set out in Article 7 of the Directive.  

The  Commission  shall  submit  a  report  on  the  application  of  this  Directive  to  the  European 
Parliament and to the Council every five years, which should start counting after [1 January 
2024]. The results of this proposal will be included in the report to the European Parliament 
and to the Council that will be issued by [1 January 2029]. 

• 

Detailed explanation of the specific provisions of the proposal 

This  proposal  applies  to  all  taxpayers  which  are  subject  to  corporate  income  tax  in  one  or 
more Member States, with the exception of financial undertakings, as defined in Article 3(1).  

It includes two separate measures that apply independently: 1) an allowance on equity; and 2) 
a limitation to interest deduction. Financial undertakings are not in the scope of the measures. 
Some financial undertakings are subject to regulatory equity requirements that prevent under-
equitisation.  In  addition,  many  are  unlikely  to  be  affected  by  the  countervailing  interest 
limitation  deduction  applicable  to  exceeding  borrowing  costs.  Therefore,  should  financial 
undertakings  be  included  in  the  scope,  the  economic  burden  of  the  measures  would  be 
unequally distributed at the expense of non-financial undertakings.  

• 

Allowance on equity 

 The  allowance  on  equity  is  computed  by  multiplying  the  allowance  base  with  the  relevant 
notional interest rate.  

Allowance on equity = Allowance Base X Notional Interest Rate (NIR) 

The allowance base  is equal  to  the difference between equity  at  the end of the tax  year and 
equity at the end of the previous tax year that is the year-on-year increase in equity.  

If the allowance base of a taxpayer that has  already  benefitted from an allowance on equity 
under  the  rules  of  this  Directive,  is  negative  in  a  given  tax  period  (equity  decrease),  a 
proportionate amount will become taxable for 10 consecutive tax periods and up to the total 
increase  of  net  equity  for  which  such  allowance  has  been  obtained,  unless  the  taxpayer 

EN 

7 

  EN 

provides  evidence  that  this  is  due  to  losses  incurred  during  the  tax  period  or  due  to  a  legal 
obligation. 
Equity is defined by reference to Directive 2013/34/EU (Accounting Directive)9, meaning the 
sum  of  Paid-up  Capital,  Share  premium  account,  Revaluation  reserve  and  Reserves10  and 
Profits  or  Losses  carried  forward.  Net  equity  is  then  defined  as  the  difference  between  the 
equity  of  a  taxpayer  and  the  sum  of  the  tax  value  of  its  participation  in  the  capital  of 
associated enterprises and of its own shares. This definition is meant to prevent cascading the 
allowance through participations. 

The relevant notional interest rate is based on two components: the risk-free interest rate and a 
risk  premium.  The  risk-free  interest  rate  is  the  risk-free  interest  rate  with  a  maturity  of  ten 
years, as laid down in the implementing acts to Article 77e(2) of Directive 2009/138/EC11, in 
which the allowance is claimed, for the currency of the taxpayer. The risk premium is set at 
1%, to better account for the risk premium that investors actually pay and better mitigate the 
bias. The risk premium is set at 1.5% in the case of taxpayers qualifying as small or medium-
sized  enterprises,  to  better  reflect  the  higher  risk  premium  they  incur  to  obtain  financing. 
There should be no discretion on the part of Member States as to whether to apply this higher 
rate  for  SMEs  or  what  rate  to  apply  as  the  top-up  for  SMEs  in  order  to  avoid  selectivity 
concerns as regards EU State Aids rules and to ensure a level playing field for SMEs in the 
EU regardless of their place of residence. 

NIR = Risk Free Rate + Risk Premium 

Risk Premium = 1% (or 1.5% for SMEs) 

The  notional  interest  rate  is  hence  equal  to  the  currency  specific  risk-free  rate  plus  1%  or 
1.5% (NIR = risk free rate + 1% or, for SMEs, NIR = risk free rate + 1.5%). This approach 
ensures that the measure has an impact while remains simple to implement and does not harm 
Member States’ budgets. It also ensures that the specific circumstances of different businesses 
are  taken  into  account.  A  specific  currency  rate  better  ensures  the  balance  of  tax  treatment 
between  equity  and  debt  since  it  takes  into  account  the  currency  risk  separately  for  each 
currency and reflects the specific situation of each taxpayer.  

The  allowance  is  granted  for  ten  years  to  approximate  the  maturity  of  most  debt,  while 
keeping the overall budgetary cost of the allowance on equity under control. This means that 
if an increase in a taxpayer’s equity qualifies for an allowance on equity under this proposal, 
the  relevant  allowance,  computed  as  above,  shall  be  deductible  in  the  year  it  was  incurred 
(TY) and in the next successive nine years (TY+9). If, in the following year (TY+1), a new 
increase in a taxpayer’s equity also qualifies for an allowance on equity under this proposal, 
the new allowance on equity will also be deductible for the  tax year it was incurred and the 
following nine years since its incurrence (until TY+10). 

9 

10 

11 

In the sense of Annex III to Directive 2013/34/EU of the European Parliament and of the Council on the 
annual  financial  statements,  consolidated  financial  statements  and  related  reports  of  certain  types  of 
undertakings. 
Reserves include: 1. Legal reserve, in so far as national law requires such a reserve; 2. Reserve for own 
shares, in so far as national law requires such a reserve, without prejudice to point (b) of Article 24(1) 
of  Directive  2012/30/EU;  3.  Reserves  provided  for  by  the  articles  of  association;  4.  Other  reserves, 
including the fair value reserve 
Directive 2009/138/EC Of The European Parliament And Of The Council of 25 November 2009 on the 
taking-up  and  pursuit  of  the  business  of  Insurance  and  Reinsurance  (Solvency  II)  (recast)  (OJ  L 
335/17.12.2009, p.1) 

EN 

8 

  EN 

                                                 
By way of example, if a company having equity of 100, decides to increase in year t its equity 
by 20, an allowance will be deducted from its taxable base every year for ten years (until t+9) 
calculated as 20 times the notional interest rate, i.e. 20 times the risk-free interest rate for the 
relevant currency plus 20 (20 times the risk premium defined as 1). 

Year 

t 

t - 1 

Equity of Company A  

120 

100 

Allowance base = 120 – 100 = 20 

Allowance = Allowance base X NIR = 20 X NIR 

The allowance will be available for 10 consecutive years : t, t+1, t+2, ….t+9 

If the company is a small or medium enterprise, the allowance will be calculated in the same 
way. The NIR will simply be different since the risk premium is higher (1.5 % instead of 1%).  

To prevent tax abuse, the deductibility of the allowance is limited to a maximum of 30% of 
the taxpayer’s EBITDA (earnings before interest, tax, depreciation and amortization) for each 
tax  year.  A  taxpayer  will  be  able  to  carry  forward,  without  time  limitation,  the  part  of  the 
allowance on equity that would not be deducted in a tax year due to insufficient taxable profit. 
In addition, the taxpayer will be able to carry forward, for a period of maximum five years, 
unused allowance capacity, where the allowance on equity does not reach the aforementioned 
maximum amount.  

Robust anti-abuse measures will ensure that the rules on the deductibility of an allowance on 
equity  are  not  used  for  unintended  purposes.  These  anti-abuse  rules  are  inspired  from  the 
Guidance on notional interest deduction regimes which was adopted by the Code of Conduct 
Group  in  2019  and  address  well-known  existing  schemes,  such  as  cascading  the  allowance 
within a group.  

A first measure would exclude from the base of the allowance equity increases that originate 
from  (i)  intra-group  loans,  (ii)  intra-group  transfers  of  participations  or  existing  business 
activities and (iii) cash contributions under certain conditions. Thus, for example, as regards 
intra-group loans, the measure should prevent that an equity injection granted to company A 
located in Member State A is used to grant a loan to a related company B located in Member 
State B. This is because in such case, company B would also use this money to inject equity 
in another related company C, located in Member State C. This would lead to multiplying the 
allowance on equity with only one genuine equity increase at group level. 

Another  measure  sets  out  specific  conditions  for  taking  into  account  equity  increases 
originating  from  contributions  in  kind  or  investments  in  assets.  It  aims  to  prevent  the 
overvaluation of assets or purchase of luxury goods for the purpose of increasing the base of 
the allowance. Thus, for example, the value of an asset and the related costs should not exceed 
reasonable professional needs and any part of the value of the asset contributed or recorded in 
the taxpayer’s accounting books over its market value should be deducted from the base of the 
allowance. 

A  third  measure  targets  the  re-categorisation  of  old  capital  as  new  capital,  which  would 
qualify as an equity increase for the purpose of the allowance. Such re-categorisation could be 
achieved  through  a  liquidation  and  the  creation  of  start-ups.  For  example,  if  an  existing 
company, with retained earnings, is liquidated, there will be an increase in the equity of the 
parent  company  due  to  the  incorporation  of  the  retained  earnings.  If  a  new  subsidiary  is 
subsequently  created  and  is  no  longer  held  by  the  parent,  the  previously  increased  base  of 
allowance  of  the  parent  would  not  be  reduced  by  the  value  of  the  participation  in  the 
subsidiary. 

EN 

9 

  EN 

 
 
 
• 

Limitation to interest deduction 

On the debt side, the allowance for notional interest on equity is accompanied by a limitation 
to  the  tax  deductibility  of  debt-related  interest  payments.  In  particular,  a  proportional 
restriction  will  limit  the  deductibility  of  interest  to  85%  of  exceeding  borrowing  costs  (i.e. 
interest  paid  minus  interest  received).  Such  an  approach  allows  addressing  the  debt-equity 
bias  simultaneously  from  both  the  equity  and  the  debt  side,  which  is  most  efficient  and 
preserves the sustainability of Member States’ public finances.  

Given that interest limitation rules already apply in the EU under Article 4 of the ATAD, the 
taxpayer will apply the rule of Article 6 of this proposal as a first step and then, calculate the 
limitation  applicable  in  accordance  with  article  4  of  ATAD.  If  the  result  of  applying  the 
ATAD  rule  is  a  lower  deductible  amount,  the  taxpayer  will  be  entitled  to  carry  forward  or 
back the difference in accordance with Article 4 of ATAD.  

By way of example, if company A has exceeding borrowing costs of 100, it should: 

(1) 

(2) 

First, apply Article 6 of this directive proposal that limits the deductibility to 85% of 
100 = 85 and thus renders a non-deductible amount of 15.  

Second, compute the amount that would be deductible under Article 4 of the ATAD. 
If  the  deductible  amount  is  lower,  e.g.  80  (and  subsequently  the  non-deductible 
higher, i.e. 20), the difference in the deductibility, i.e. the additional non-deductible 
amount  (i.e.  85-80  =  5)  would  be  carried  forward  or  back  in  accordance  with  the 
conditions of Article 4 of ATAD, as transposed in national law. 

The  outcome  for  company  A  is  that  15  (100  -  85)  of  interest  borrowing  costs  are  non-
deductible and a further 5 (85 – 80) of interest borrowing costs are carried forward or back. 

• 

Monitoring and reporting 

Member  States  will  provide  specific  data  to  the  Commission  on  a  yearly  basis  in  order  to 
allow monitoring the implementation and effects of the new rules. The Commission will rely 
on  these  data,  amongst  others,  in  order  to  evaluate  the  implementation  of  the  Directive  and 
report accordingly. 

• 

Delegation 

The Commission will have the power to modify the risk premium rate by adopting delegated 
acts. The Commission may exercise such power only under specific circumstances, i.e. where 
inflation and/or economic growth trends require an increase or decrease of the risk premium 
and  provided  that  relevant  data,  reports  and  statistics,  including  those  provided  by  Member 
States, conclude that the EU average of the financing conditions of debt of the companies in 
scope  of  the  directive  have  doubled  or  halved  since  the  last  determination  of  the  risk 
premium.  In such cases  it is in  fact  essential to be able to  change applicable rates to  reflect 
real market conditions quickly and smoothly, without recourse to a full legislative procedure. 
The power of the Commission is however duly restricted and revocable.  

• 

Transposition  

Member States that have  rules  in  place providing  for an allowance on equity increases  may 
defer  the  application  of  the  provisions  of  this  directive  for  the  duration  of  rights  already 
established under domestic rules (grandfathering)Taxpayers that, on [1 January 2024] benefit 
from an allowance on equity , under domestic law (in Belgium, Cyprus, Italy, Malta, Poland 
and Portugal) will be able to continue to benefit from such allowance under national law for a 
period  of  up  to  10  years  and  in  no  case  for  a  period  longer  than  the  duration  of  the  benefit 

EN 

10 

  EN 

under  national  law.  Conversely  the  rules  of  this  directive  will  apply  from  their  date  of 
application to all other taxpayers in all Member States. 

EN 

11 

  EN 

2022/0154 (CNS) 

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 

THE COUNCIL OF THE EUROPEAN UNION, 

Having  regard  to  the  Treaty  on  the  Functioning  of  the  European  Union,  and  in  particular 
Article 115 thereof, 

Having regard to the proposal from the European Commission, 

After transmission of the draft legislative act to the national parliaments, 
Having regard to the opinion of the European Parliament12,  
Having regard to the opinion of the European Economic and Social Committee13,  

Acting in accordance with a special legislative procedure, 

Whereas: 

(1) 

Promoting a fair and sustainable business environment, including through targeted tax 
measures  that  incentivise  investment  and  growth,  is  a  high  political  priority  of  the 
Union.  To  support  sustainable  and  long-term  corporate  financing,  the  tax  system 
should  minimise  unintended  distortions  of  business  decisions,  for  example  towards 
debt  rather  than  equity  financing.  While  the  Commission’s  Capital  Markets  Union 
2020 Action Plan14 includes important actions to support such financing, for example 
Action  4  -  Encouraging  more  long-term  and  equity  financing  from  institutional 
investors, targeted tax measures should  be  adopted in  order to enhance such actions. 
Such measures should take into account fiscal sustainability considerations. 

(2)  Member States’ tax systems allow the taxpayers to deduct interest payments on debt 
financing, and thereby reduce the corporate income tax liability, while costs related to 
equity  financing  are  non-tax  deductible  in  most Member  States.  The  asymmetric  tax 
treatment of debt and equity financing across the Union induces a bias towards debt in 
investment decisions. Moreover, where Member States provide for a tax allowance on 
equity  financing in  their domestic law, such national measures differ significantly in 
terms of policy design.  

(3) 

12 
13 
14 

In  order  to  remove  possible  tax  related  distortions  among  Member  States,  it  is 
necessary to lay down a common framework of rules to address the tax related debt-
equity bias  across the Union  in  a  coordinated manner. Such rules should  ensure that 

OJ C , , p. .Not yet published in the Official Journal. 
OJ C , , p. .Not yet published in the Official Journal. 

Communication from the Commission to the European Parliament, the Council, the European 
Economic  and  Social  Committee  and  the  Committee  of  the  Regions  ‘A  Capital  Markets  Union  for 
(https://eur-
plan’, 
people 
lex.europa.eu/resource.html?uri=cellar:61042990-fe46-11ea-b44f-01aa75ed71a1.0001.02/DOC_1&format=PDF)  

businesses-new 

COM(2020) 

action 

final 

590 

and 

EN 

12 

  EN 

                                                 
 
 
(4) 

(5) 

(6) 

equity and debt financing are treated in a similar way for tax purposes across the single 
market.  At  the  same  time,  a  common  Union  legislative  framework  should  be 
sustainable also in the short term for Member States’ budgets. Such framework should 
therefore include rules,  on the one hand, for the tax deductibility of equity financing 
costs and, on the other, for limiting the tax deductibility of debt financing costs. 

To ensure a simple and comprehensive legislative framework, the common framework 
of  rules  should  apply  to  all  undertakings  in  the  Union  that  are  subject  to  corporate 
income  tax  in  a  Member  State.  Financial  undertakings  have  special  features  and 
require a specific treatment. If the rules to address the tax related debt-equity bias were 
to apply to them, the economic burden of the measures would be unequally distributed 
at the expense of non-financial undertakings. Financial undertakings should therefore 
be excluded from the scope of this Directive. 

To neutralise the bias against equity  financing, an allowance should be envisaged so 
that  increases  in  a  taxpayer's  equity  from  one  tax  period  to  the  next  are  deductible 
from its taxable base, subject to certain conditions. The allowance should be calculated 
by  multiplying  the  increase  in  equity  with  a  notional  interest  rate  based  on  risk-free 
interest rate as laid down in the implementing acts adopted pursuant to Article 77e(2) 
of Directive 2009/138/EC. Such risk-free interest rates are already part of EU law and 
have been practically and effectively applied as such. Any part of the allowance that 
cannot  be deducted in  a  tax  period  due to  insufficient  taxable profits may be carried 
forward.  Taking  into  account  the  specific  challenges  that  small-  and  medium-sized 
enterprises (SMEs) face in accessing capital markets, an increased allowance on equity 
should  be  envisaged  for  taxpayers  that  are  SMEs.  In  order  for  the  deduction  of  an 
allowance on equity to be sustainable for public finances in the short term, it should be 
limited in time. To safeguard the system from abuses, it is necessary to exclude the tax 
value  of  a  taxpayer's  own  shares  as  well  as  that  of  its  participation  in  associated 
enterprises from the calculation of changes in equity. In the same vein, it is necessary 
to provide for the taxation of a decrease in a taxpayer’s equity from one tax period to 
the  following  one,  to  prevent  an  equity  increase  from  being  effected  in  an  abusive 
manner. Such a rule would also encourage the retention of a level of equity. It would 
apply so that where there is a decrease in equity of a taxpayer that has benefitted from 
an  allowance  on  equity  increase,  an  amount  calculated  in  the  same  way  as  the 
allowance  would  become  taxable  for  10  tax  periods;  unless  the  taxpayer  provides 
evidence that this decrease is exclusively due to losses incurred during the tax period 
or due to a legal obligation. 

In order to avoid a misuse of the deduction of the allowance on equity, it is necessary 
to  lay down specific anti-tax avoidance rules. Such rules should target, in particular, 
schemes  put  in  place  to  circumvent  the  conditions  on  which  an  equity  increase 
qualifies  for  an  allowance  under  this  Directive,  for  instance,  through  the  intra-group 
transfer  of  participations  in  associated  enterprises.  Such  rules  should  also  target 
schemes  put  in  place  to  claim  an  allowance  in  the  absence  of  any  equity  increase  at 
group level. For example, intra-group debt financing or contributions in cash could be 
used for these purposes. Specific anti-tax avoidance rules should also prevent schemes 
from  being  put  in  place  to  claim  that  an  increase  in  equity,  and  the  corresponding 
allowance,  is  higher  than  it  actually  is,  for  example,  through  an  increase  in  loan 
financing receivables or overvaluation of assets. Moreover, the general anti-tax abuse 

EN 

13 

  EN 

(7) 

(8) 

(9) 

(10) 

rule  in  Article  6  of  Council  Directive  (EU)  2016/116415  applies  against  abusive  acts 
which are not covered by the specific anti-tax avoidance framework of this Directive. 

To effectively address the tax-related debt-equity bias in a manner sustainable for the 
Union’s public finances, an allowance for equity financing should be accompanied by 
a  limitation  on  the  deductibility  of  debt  financing  costs.  An  interest  limitation  rule 
should  therefore  limit  the  deductibility  of  exceeding  borrowing  costs  and  apply 
independently from the allowance. Given the different objectives between such a rule 
and the existing anti-tax avoidance rule on interest limitation of Article 4 of Directive 
(EU) 2016/1164, both rules should be maintained. Taxpayers should first calculate the 
deductibility of exceeding borrowing costs under this Directive and then under ATAD. 
In the event that the latter results in a lower amount of deductible exceeding borrowing 
costs,  the  taxpayer  should  deduct  this  lower  amount  and  carry  forward  or  back  any 
difference between the two amounts in accordance with Article 4 of ATAD.   

As the implementation and enforcement of the Union rules in each Member State are 
critical for safeguarding Member States’ tax bases and, where necessary, for properly 
reviewing the Union rules, such implementation and enforcement should be monitored 
by the Commission. Member States should therefore communicate to the Commission, 
on  a  regular  basis,  specific  information  on  the  implementation  and  enforcement  in 
their territory of national measures transposing this Directive.  

In order to evaluate the effectiveness of this Directive, the Commission should prepare 
and publish an evaluation report on the basis of the information provided by Member 
States and of other available data.  

In  order  to  enable  the  smooth  and  prompt  amendment  of  certain  non-essential 
elements  of  this  Directive  taking  into  account  ongoing  developments,  the  power  to 
adopt  acts  in  accordance  with  Article  290  of  the  Treaty  on  the  Functioning  of  the 
European Union should be delegated to the Commission, so that the latter can amend 
this  Directive,  to  modify  the  level  of  the  risk  premium  rate  as  an  element  for  the 
calculation  of  the  allowance  on  equity.  It  is  of  particular  importance  that  the 
Commission carry out appropriate consultations during its preparatory work, including 
at  expert  level,  and  that  those  consultations  be  conducted  in  accordance  with  the 
principles  laid  down  in  the  Interinstitutional  Agreement  of  13  April  2016  on  Better 
Law-Making16.  In  particular,  to  ensure  equal  participation  in  the  preparation  of 
delegated acts, the Council should receive all documents at the same time as Member 
States'  experts,  and  its  experts  should  systematically  be  given  access  to  meetings  of 
Commission expert groups dealing with the preparation of delegated acts. 

(11)  Since  the  objective  of  this  Directive  cannot  sufficiently  be  achieved  by  the  Member 
States but can rather, by reason of the need to provide balanced incentives for business 
location and entrepreneurship in the single market, be better achieved at Union level, 
the Union may adopt measures, in accordance with the principle of subsidiarity as set 
out in Article 5 of the Treaty on European Union. In accordance with the principle of 
proportionality as set out in that Article, this Directive  should not go beyond what is 
necessary in order to achieve that objective, 

15 
that directly affect the functioning of the internal market (OJ L 193, 19.7.2016, p. 1). 

Council Directive (EU) 2016/1164 of 12 July 2016 laying down rules against tax avoidance practices 

16 

OJ L 123, 12.5.2016, p. 1. 

EN 

14 

  EN 

                                                 
HAS ADOPTED THIS DIRECTIVE: 

CHAPTER I  
GENERAL PROVISIONS 

Article 1  
Subject matter 

This  Directive  lays  down  rules  on  the  deduction,  for  corporate  income  tax  purposes,  of  an 
allowance  on  increases  in  equity  and  on  the  limitation  of  the  tax  deductibility  of  exceeding 
borrowing costs.  

Article 2  
Scope 

This  Directive  applies  to  taxpayers  that  are  subject  to  corporate  income  tax  in  one  or  more 
Member States, including permanent establishments in one or more Member State of entities 
resident for tax purposes in a third country.  

However, this Directive does not apply to the following financial undertakings:  

(a) 

(b) 

(c) 

 ‘credit  institution’  as  defined  in  Article  4(1),  point  (1),  of  Regulation  (EU)  No 
575/2013 the European Parliament and of the Council17;  

‘investment firm’ as defined in Article 4(1), point (1), of Directive 2014/65/EU the 
European Parliament and of the Council18;  

‘alternative  investment  fund  manager’    as  defined  in  Article  4(1),  point  (b),  of 
Directive 2011/61/EU of the European Parliament and of the Council19, including a 
manager of European venture capital funds under Regulation (EU) No 345/2013 of 
the  European  Parliament  and  of  the  Council20,  a  manager  of  European  social 
entrepreneurship  funds  under  Regulation  (EU)  No  346/2013  of  the  European 
Parliament  and  of  the  Council21  and  a  manager  of  European  long-term  investment 
funds  under  Regulation  (EU)  2015/760  of  the  European  Parliament  and  of  the 
Council22; 

Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on  

17 
prudential requirements for credit institutions and investment firms and amending Regulation (EU) No  
648/2012 (OJ L 176, 27.6.2013, p. 1). 
18 
financial instruments and amending Directive 2002/92/EC and Directive 2011/61/EU (OJ L 173,  
12.6.2014, p. 349). 
19 

Directive 2014/65/EU of the European Parliament and of the Council of 15 May 2014 on markets in  

Directive  2011/61/EU  of  the  European  Parliament  and  of  the  Council  of  8  June  2011  on  Alternative 
Investment  Fund  Managers  and  amending  Directives  2003/41/EC  and  2009/65/EC  and  Regulations 
(EC) No 1060/2009 and (EU) No 1095/2010 (OJ L 174, 1.7.2011, p. 1). 
Regulation  (EU)  No  345/2013  of  the  European  Parliament  and  of  the  Council  of  17  April  2013  on 
European venture capital funds (OJ L 115, 25.4.2013, p. 1). 
Regulation  (EU)  No  346/2013  of  the  European  Parliament  and  of  the  Council  of  17  April  2013  on 
European social entrepreneurship funds (OJ L 115, 25.4.2013, p. 18). 
Regulation  (EU)  2015/760  of  the  European  Parliament  and  of  the  Council  of  29  April  2015  on 
European long-term investment funds (OJ L 123, 19.5.2015, p. 98). 

20 

21 

22 

EN 

15 

  EN 

                                                 
(d) 

(e) 

(f) 

(g) 

(h) 

(i) 

(j) 

(k) 

(l) 

(m) 

(n) 

23 

24 

25 

26 

‘undertaking  for  collective  investment  in  transferable  securities’  management 
company’  as  defined  Article  2(1),  point  (b),  of  Directive  2009/65/EC  of  the 
European Parliament and of the Council23;  

‘insurance undertaking’ as defined in Article 13, point (1), of Directive 2009/138/EC 
of the European Parliament and of the Council24;  

‘reinsurance  undertaking’  as  defined  in  Article  13,  point  (4),  of  Directive 
2009/138/EC;  

‘institution for occupational retirement provision’ as defined in Article 6, point (1), 
of Directive (EU) 2016/2341 of the European Parliament and of the Council25;  

pension  institutions  operating  pension  schemes  which  are  covered  by  Regulation 
(EC) No 883/2004  of the European Parliament  and of the Council26 as  well as  any 
legal entity set up for the purpose of investment in such schemes;  

‘alternative  investment  fund’  as  defined  in  Article  4(1),  point  (a),  of  Directive 
2011/61/EU,  managed  by  an  alternative  investment  fund  manager,  as  defined  in 
Article 4(1), point (b), of Directive 2011/61/EU or an alternative investment fund as 
defined  in  Article  4(1),  point  (a),  of  Directive  2011/61/EU  supervised  under  the 
applicable national law;  

undertakings  for  collective investment  in  transferable securities  within  the meaning 
of Article 1(2) of Directive 2009/65/EC;  

‘central  counterparty’  as  defined  in  Article  2,  point  (1),  of  Regulation  (EU)  No 
648/2012 of the European Parliament and of the Council27;  

‘central  securities  depository’  as  defined  in  Article  2(1),  point  (1),  of  Regulation 
(EU) No 909/2014 of the European Parliament and of the Council28;  

a  special  purpose  vehicle  authorised  in  accordance  with  Article  211  of  Directive 
2009/138/EC; 

‘securitisation special purpose entity’ as defined in Article 2, point (2), of Regulation 
(EU) No 2017/2402 of the European Parliament and of the Council29;  

Directive  2009/65/EC  of  the  European  Parliament  and  of  the  Council  of  13  July  2009  on  the 
coordination  of  laws,  regulations  and  administrative  provisions  relating  to  undertakings  for  collective 
investment in transferable securities (UCITS) (OJ L 302, 17.11.2009, p. 32). 
Directive  2009/138/EC  of  the  European  Parliament  and  of  the  Council  of  25  November  2009  on  the 
taking-up  and  pursuit  of  the  business  of  Insurance  and  Reinsurance  (Solvency  II)  (OJ  L  335, 
17.12.2009, p. 1). 
Directive (EU) 2016/2341 of the European Parliament and of the Council of 14 December 2016 on the 
activities  and  supervision  of  institutions  for  occupational  retirement  provision  (IORPs)  (OJ  L  354, 
23.12.2016, p. 37). 
Regulation (EC) No 883/2004 of the European Parliament and of the Council of 29 April 2004 on the 
coordination of social security systems (OJ L 166, 30.4.2004, p. 1). 
Regulation (EU) No 648/2012 of the European Parliament and of the Council of 4 July 2012 on OTC  

Regulation (EU) No 909/2014 of the European Parliament and of the Council of 23 July 2014 on  

27 
derivatives, central counterparties and trade repositories (OJ L 201, 27.7.2012, p. 1). 
28 
improving securities settlement in the European Union and on central securities depositories and  
amending Directives 98/26/EC and 2014/65/EU and Regulation (EU) No 236/2012 (OJ L 257,  
28.8.2014, p. 1). 
29 
down a general framework for securitisation and creating a specific framework for simple, transparent  
and standardised securitisation, and amending Directives 2009/65/EC, 2009/138/EC and 2011/61/EU  

Regulation (EU) 2017/2402 of the European Parliament and of the Council of 12 December 2017 laying  

EN 

16 

  EN 

                                                 
 
(o) 

(p) 

(q) 

(r) 

(s) 

‘insurance  holding  company’  as  defined  in  Article  212(1),  point  (f),  of  Directive 
2009/138/EC  or  ‘mixed  financial  holding  company’  as  defined  in  Article  212(1), 
point  (h),  of  Directive  2009/138/EC,  which  is  part  of  an  insurance  group  that  is 
subject  to  supervision  at  the  level  of  the  group  pursuant  to  Article  213  of  that 
Directive  and  which  is  not  excluded  from  group  supervision  pursuant  to  Article 
214(2) of Directive 2009/138/EC;  

‘payment institution’ as defined in Article 4, point (4), of Directive (EU) 2015/2366 
of the European Parliament and of the Council30;  

‘electronic  money  institution’  as  defined  in  Article  2,  point  (1),  of  Directive 
2009/110/EC of the European Parliament and of the Council31;  

‘crowdfunding service provider’ as  defined in  Article 2(1), point (e),  of  Regulation 
(EU) 2020/1503 of the European Parliament and of the Council32;  

‘crypto-asset  service  provider’  as  defined  in  Article  3(1),  point  (8),  of  Regulation 
…/… of the European Parliament and of the Council33  

Article 3 
Definitions 

For the purposes of this Directive, the following definitions shall apply: 

(1) 

‘associated enterprise’ means a person who is related to another person in any of the 
following ways: 

(a) 

(b) 

(c) 

the  person  participates  in  the  management  of  the  other  person  by  being  in  a 
position to exercise a significant influence over the other person; 

the person participates in the control of the other person through a holding that 
exceeds 25 % of the voting rights; 

the  person  participates  in  the  capital  of  the  other  person  through  a  right  of 
ownership that, directly or indirectly, exceeds 25 % of the subscribed capital; 

(d) 

the person is entitled to 25 % or more of the profits of the other person. 

Directive 2009/110/EC of the European Parliament and of the Council of 16 September 2009 on the  

Directive (EU) 2015/2366 of the European Parliament and of the Council of 25 November 2015 on  

and Regulations (EC) No 1060/2009 and (EU) No 648/2012 (OJ L 347, 28.12.2017, p. 35). 
30 
payment services in the internal market, amending Directives 2002/65/EC, 2009/110/EC and  
2013/36/EU and Regulation (EU) No 1093/2010, and repealing Directive 2007/64/EC (OJ L 337,  
23.12.2015, p. 35). 
31 
taking up, pursuit and prudential supervision of the business of electronic money institutions amending  
Directives 2005/60/EC and 2006/48/EC and repealing Directive 2000/46/EC (OJ L 267, 10.10.2009, p.  
7). 
32 
European crowdfunding service providers for business, and amending Regulation (EU) 2017/1129 and  
Directive (EU) 2019/1937 (OJ L 347, 20.10.2020, p. 1). 
33 

Regulation (EU) 2020/1503 of the European Parliament and of the Council of 7 October 2020 on  

Regulation  of  the  European  Parliament  and  of  the  Council  on  Markets  in  Crypto-assets,  and 
amending  Directive  (EU)  2019/193731  (OJ  L…)  (OJ:  Please  insert  in  the  text  the  number  of  the 
Regulation  contained  in  document  2020/0265/COD  and  insert  the  number,  date,  and  OJ  reference  of 
that Directive in the footnote.) 

EN 

17 

  EN 

                                                                                                                                                         
 
 
If more than one person participates in the management, control, capital or profits of 
the  same  person,  as  referred  to  in  paragraph  1,  all  persons  concerned  shall  be 
regarded as associated enterprises. 

If the same persons participate in the management, control, capital or profits of more 
than one person, as referred to in paragraph 1 all persons concerned shall be regarded 
as associated enterprises. 

For the purposes of this definition , ‘person’ means both legal and natural persons. A 
person who acts together with another person in respect of the voting rights or capital 
ownership of an entity shall be treated as holding a participation in all of the voting 
rights or capital ownership of that entity that are held by the other person. 

In  indirect  participations,  the  fulfilment  of  the  criteria  set  out  in  point  (c)  of 
paragraph  1  shall  be  determined  by  multiplying  the  rates  of  holding  through  the 
successive  tiers.  A  person  holding  more  than  50  %  of  the  voting  rights  shall  be 
deemed to hold 100 %. 

The  spouse,  and  lineal  descendants  of  an  individual,  together  with  the  individual, 
shall be treated as a single person. 

An  associated  enterprise  in  accordance  with  this  paragraph  shall  also  include  any 
operation as a result of which a person becomes an associated enterprise; 

'tax period' means a calendar year or any other appropriate period for tax purposes; 

‘group’ means a group as defined in Article 2, point (11), Directive 2013/34/EU of 
the European Parliament and of the Council34. 

‘participation’  means  participating  interest  as  defined  in  Article  2,  point  (2),  of 
Directive 2013/34/EU; 

‘SME’ means all undertakings which do not exceed the threshold for medium-sized 
undertakings, as laid down in Article 3(3) of Directive 2013/34/EU; 

‘equity’ means, in a given tax period, the sum of the taxpayer’s paid-up capital, share 
premium accounts, revaluation reserve and other reserves and profit or loss brought 
forward; 

‘net equity’ means the difference between the equity of a taxpayer and the sum of the 
tax value of the taxpayer’s  participation in  the capital  of associated enterprises  and 
the taxpayer’s own shares; 

(2) 

(3) 

(4) 

(5) 

(6) 

(7) 

(8) 

‘reserves’ means any of the following: 

(1) 

(2) 

legal reserve, in so far as national law requires such a reserve; 

reserve  for  own  shares,  in  so  far  as  national  law  requires  such  a  reserve, 
without prejudice to Article 24(1), point (b), of Directive 2012/30/EU;  

(3) 

reserves provided for by the articles of association; 

(4)  other reserves, including the fair value reserve. 

Directive 2013/34/EU of the European Parliament and of the Council of 26 June 2013 on the annual 

34 
financial statements, consolidated financial statements and related reports of certain types of undertakings, 
amending Directive 2006/43/EC of the European Parliament and of the Council and repealing Council Directives 
78/660/EEC and 83/349/EEC (OJ L 182, 29.6.2013, p. 19). 

EN 

18 

  EN 

                                                 
CHAPTER II  
ALLOWANCE ON EQUITY AND INTEREST DEDUCTIONS 

Article 4 
Allowance on Equity 

1. 

An allowance on equity shall be deductible, for 10 consecutive tax periods, from the 
taxable  base  of  a  taxpayer  for  corporate  income  tax  purposes  up  to  30%  of  the 
taxpayer's earnings before interest, tax, depreciation and amortisation (“EBITDA ”).  

If the deductible  allowance  on equity, in  accordance  with  the first  subparagraph,  is 
higher  than  the  taxpayer’s  net  taxable  income  in  a  tax  period,  Member  States  shall 
ensure  that  the  taxpayer  may  carry  forward,  without  time  limitation,  the  excess  of 
allowance on equity to the following periods.  

Member States shall ensure that the taxpayers may carry forward, for a maximum of 
5 tax periods, the part of the allowance on equity which exceeds 30% of EBITDA in 
a tax period. 

2. 

Subject  to  Article  5,  the  base  of  the  allowance  on  equity  shall  be  calculated  as  the 
difference between the level of net equity at the end of the tax period and the level of 
net equity at the end of the previous tax period.  

3. 

4. 

The allowance on equity shall be equal to the base of the allowance multiplied by the 
10-year  risk-free  interest  rate  for  the  relevant  currency  and  increased  by  a  risk 
premium of 1% or, where the taxpayer is an SME, a risk premium of 1.5%. 

For the purposes of the second subparagraph of this paragraph, the 10-year risk-free 
interest  rate  for  the  relevant  currency  shall  be  the  risk-free  interest  rate  with  a 
maturity of 10 years for the relevant currency, as laid down in the implementing acts 
adopted pursuant  to  Article 77e(2) of Directive 2009/138/EC  for the reference date 
of 31 December of the year preceding the relevant tax period. 

If, after having obtained an allowance on equity, the base of the allowance on equity 
is negative in a tax period, an amount equal to the negative allowance on equity shall 
become  taxable  for  10  consecutive  tax  periods,  up  to  the  overall  increase  of  net 
equity for  which such allowance has been obtained under this  Directive,  unless the 
taxpayer  provides  sufficient  evidence  that  this  is  due  to  accounting  losses  incurred 
during the tax period or due to a legal obligation to reduce capital. 

The  Commission  shall  be  empowered  to  adopt  delegated  acts  in  accordance  with 
Article  9  amending  paragraph  2  of  this  Article  by  modifying  the  rate  of  the  risk 
premium, where any of the following two conditions is met: 

the  10-year  risk-free  interest  rate  as  referred  to  in  paragraph  2  of  this  Article 
varies by more than two percentage points with regard to at least three Union 
currencies  compared to the tax  period in  which  the  most recent  delegated act 
modifying  the  risk  premium,  or,  where  there  is  no  such  delegated  act,  this 
Directive started to apply; or 

zero or negative growth of the gross domestic product of the EU area in at least 
two successive quarters; 

(a) 

(b) 

and 

EN 

19 

  EN 

(c)  

the  relevant  data,  reports  and  statistics,  including  those  provided  by  Member 
States,  conclude  that  the  EU  average  of  the  financing  conditions  of  debt  for 
taxpayers in scope of this directive has more than doubled or halved since the 
last determination of the risk premium established in paragraph 2.   

The  percentage  of  increase  or  decrease  of  the  risk  premium  shall  take  into  account  the 
changes in the financing conditions mentioned under point (c) of the first subparagraph other 
than changes  in  the  risk-free interest  rate for the  EU as laid down in  the  implementing acts 
adopted  pursuant  to  Article  77e(2)  of  Directive  2009/138/EC,  and  in  any  case  shall  not 
begreater than the percentage of increase or decrease of the financing  conditions  mentioned 
under point (c) of the first subparagraph. 

Article 5 
Anti-Abuse Rules  

1. 

Member  States  shall  take  appropriate  measures  to  ensure  that  the  base  of  the 
allowance on equity does not include the amount of any increase which is the result 
of: 

(a) 

(b) 

(c) 

granting loans between associated enterprises; 

a  transfer  between  associated  enterprises  of  participations  or  of  a  business 
activity as a going concern; 

a contribution in cash from a person resident for tax purposes in a jurisdiction 
that  does  not  exchange  information  with  the  Member  State  in  which  the 
taxpayer seeks to deduct the allowance on equity. 

This  paragraph  shall  not  apply  if  the  taxpayer  provides  sufficient  evidence  that  the 
relevant transaction has been carried out for valid commercial reasons and does not 
lead to a double deduction of the defined allowance on equity. 

Where an increase in equity is the result of a contribution in kind or investment in an 
asset, Member States shall take the appropriate measures to ensure that the value of 
the asset is taken into account for the calculation of the base of the allowance  only 
where the asset is necessary for the performance of the taxpayer’s income-generating 
activity. 

If the asset consists of shares, it shall be taken into account at its book value. 

If  the  asset  is  other  than  shares,  it  shall  be  taken  into  account  at  its  market  value, 
unless a different value has been given by a certified external auditor. 

Where an increase in equity is the result of a reorganisation of a group, such increase 
shall only be taken into account for the calculation of the base of the allowance on 
equity  for  the  taxpayer  in  accordance  with  Article  4  to  the  extent  that  it  does  not 
result in converting into new equity the equity (or part thereof) that already existed in 
the group before the re-organisation.  

2. 

3. 

Article 6 
Limitation to Interest Deduction  

1. 

Member States shall ensure that a taxpayer is able to deduct from its taxable base for 
corporate  income  tax  purposes  exceeding  borrowing  costs  as  defined  in  Article  1, 

EN 

20 

  EN 

point (2), of Council Directive (EU) 2016/116435 up to an amount (a) corresponding 
to 85% of such costs incurred during the tax period. If such amount is higher than the 
amount  (b)  determined  in  accordance  with  Article  4  of  Directive  (EU)  2016/1164, 
Member States shall ensure that the taxpayer be entitled to deduct only the lower of 
the two amounts in the tax period. The difference between the two amounts (a) and 
(b) shall be carried forward or back in accordance with Article 4 of Directive (EU) 
2016/1164.  

2. 

Paragraph 1 shall  apply  to  exceeding  borrowing  costs incurred  from [OP insert  the 
date of entry into force of this Directive].  

CHAPTER III 
MONITORING AND REPORTING 

Article 7 
Monitoring 

Within 3 months from the end of every tax period, each Member State shall communicate the 
following information to the Commission regarding the tax period:  

(a) 

(b) 

(c) 

(d) 

(e) 

(f) 

(g) 

the number of taxpayers that have benefited from the allowance on equity in the tax 
period, also as a percentage of the total number of taxpayers falling within the scope 
of this Directive;  

the  number  of  SMEs  that  have  benefitted  from  the  allowance  in  the  tax  period, 
including as a percentage of the total number of SMEs falling within the scope of this 
Directive  and the number of SMEs  that have benefitted from the  allowance,  which 
are part of large groups within the meaning of Article 3(7) of Directive 2013/34/EU; 

the total amount of expenditure incurred or tax revenue lost due to the deduction of 
allowance on equity allocated to the allowance on equity as compared to the national 
gross domestic product of the Member State; 

the total amount of exceeding borrowing costs; 

the total amount of non-deductible exceeding borrowing costs.; 

the number of taxpayers to which anti-abuse measures have been applied in the tax 
period  pursuant  to  this  Directive  including  the  related  tax  consequences  and 
sanctions applied; 

the  data  on  the  evolution  in  the  Member  State  of  the  debt/equity  ratio,  within  the 
meaning of Annex III, parts (A) and (C) to Directive 2013/34/EU. 

1. 

By  31  December  2027,  the  Commission  shall  present  a  report  to  the  European 
Parliament and to the Council on the implementation of this Directive. 

Article 8 
Reports  

35 
that directly affect the functioning of the internal market (OJ L 193, 19.7.2016, p. 1). 

Council Directive (EU) 2016/1164 of 12 July 2016 laying down rules against tax avoidance practices 

EN 

21 

  EN 

                                                 
2. 

3. 

1. 

2. 

3. 

4. 

5. 

6. 

When drawing up the report, the Commission shall take into account the information 
communicated by Member States pursuant to Article 7.  

The Commission shall publish the report on its website.  

CHAPTER IV 
FINAL PROVISIONS 

Article 9 
Exercise of Delegation 

The  power  to  adopt  delegated  acts  is  conferred  on  the  Commission  subject  to  the 
conditions laid down in this Article. 

The power to adopt delegated acts referred to in Article 4(5) shall be conferred on the 
Commission  for  an  indeterminate  period  of  time  from  [OP  insert  the  date  of  entry 
into force of this Directive].  

The delegation of power referred to  in  Article 4(5) may be  revoked  at  any  time by 
the  Council.  A  decision  to  revoke  shall  put  an  end  to  the  delegation  of  the  power 
specified in that decision. It shall take effect the day following the publication of the 
decision  in  the  Official  Journal  of  the  European  Union  or  at  a  later  date  specified 
therein. It shall not affect the validity of any delegated acts already in force. 

Before adopting a delegated act, the Commission shall consult experts designated by 
the 
in  accordance  with 
each  Member  State 
Interinstitutional Agreement of 13 April 2016 on Better Law-Making. 

the  principles 

laid  down 

in 

As soon as it adopts a delegated act, the Commission shall notify it to the Council.  

A  delegated  act  adopted  pursuant  to  Article  4(5)  shall  enter  into  force  only  if  no 
objection  has  been  expressed  by  the  Council  within  a  period  of  2  months  of 
notification  of  that  act  to  the  Council  or  if,  before  the  expiry  of  that  period,  the 
Council  has  informed  the  Commission  that  it  will  not  object.  That  period  shall  be 
extended by 2 months at the initiative of the Council. 

Article 10  
Informing the European Parliament 

The  European  Parliament  shall  be  informed  of  the  adoption  of  delegated  acts  by  the 
Commission, of any objection to them, and of the revocation of a delegation of powers by the 
Council.  

Article 11 
Transposition 

1. 

Member  States  shall  adopt  and  publish,  by  [31  December  2023]  at  the  latest,  the 
laws,  regulations  and  administrative  provisions  necessary  to  comply  with  this 
Directive.  They  shall  forthwith  communicate  to  the  Commission  the  text  of  those 
provisions. 

They shall apply those provisions from [1 January 2024]. 

When  Member  States  adopt  those  provisions,  they  shall  include  a  reference  to  this 
Directive  or  accompany  those  provisions  with  such  a  reference  on  the  occasion  of 

EN 

22 

  EN 

their official publication. Member States shall determine how such reference is to be 
made. 

2. 

3. 

Member  States  may  defer  the  application  of  the  provisions  of  this  Directive  to 
taxpayers  that  on  [1  January  2024]    benefit  from  an  allowance  on  equity  under 
national law for a period up to 10 years and in no case for a period longer than the 
duration of the benefit under national law.  

Member States shall communicate to the Commission the text of the main provisions 
of national law which they adopt in the field covered by this Directive. 

Article 12 
Entry into force 

This Directive shall enter into force on the twentieth day following that of its publication in 
the Official Journal of the European Union.  

Article 13 
Addressees 

This Directive is addressed to the Member States. 

Done at Brussels, 

For the Council 
The President 

EN 

23 

  EN