Opinion Statement FC 6/2022 on the European Commission Proposal for a Council Directive on debt-equity bias reduction allowance (‘DEBRA Proposal’)

CFE Tax Advisers Europe has issued an Opinion Statement on the European Commission Proposal for a Council Directive on debt-equity bias reduction allowance and on limiting the deductibility of interest for corporate income tax purposes (“DEBRA”). CFE Tax Advisers Europe welcomes the work of the European Commission in examining measures through which the Single Market will benefit from better investment and growth, including measures to support long-term and sustainable corporate financing.

On the overall policy objective of this directive, and the notion that tax rules are causing a bias among European companies to use debt rather than equity financing, CFE makes the following observations:

    • For public companies, the true debt/equity position for economic and commercial purposes is driven by the consolidated position, whereas much of the analysis supporting proposals of this nature is based on the debt/equity position of individual countries, whereas the EU proposal if adopted would apply at the level of individual companies. Inter-company debt may be relevant to tax planning (and for that reason is subject in most countries to thin capitalisation and other anti-avoidance rules) but it is completely irrelevant to the true debt/equity position for economic and commercial purposes.
    • Similarly for private companies, the true debt/equity position for economic and commercial purposes is dependent not only on the funding of the company but on the debt which the owning entities (individuals/ families) may have incurred personally to finance the business. Lenders may insist on this to get the added security of personal assets; and there may be tax aspects in national tax systems bearing on the taxation of the individuals as well as the company.
    • For public companies, the accounting rules (under which debt costs are expensed against profit, and equity costs are generally not), and which operate globally, are likely to be much more influential in determining the debt equity ratio than national tax rules
    • There is no general deduction for equity costs in the US tax system any more than in most European countries.
    • Companies in any event often have little or no choice as regards whether debt or equity is available in concrete situations such as financing acquisitions.
    • Even if tax is a factor, one needs to consider the whole picture including on taxation of equity or debt returns to investors, in trying to design policy to impact the situation.

    CFE is of the view that the proposal as designed might be detrimental to start-ups and pull equity finance away from them. Corporate entities being able to choose between debt and equity funding, would be an incentive to choose more to use equity. It is noted that there is a shortage of equity capital in Europe, as compared to the US, to finance start-ups: if more of the available equity capital is taken by corporate entities/ established companies, there will be even less available for start-ups (introducing a tax incentive for the fund-raising company will do nothing to affect the supply of equity finance from investors).

    CFE believes the DEBRA initiative should go together with an initiative to incentivise individuals to invest more in equity in the EU and also to avoid double economic and juridical taxation on eg. dividends distributed from one Member state to individuals residing in another Member state. CFE also notes the increasing complexity in the area of EU corporate tax law, including potential overlap between the DEBRA proposals with existing provisions of the ATAD directives, as well as national thin capitalisation rules (“thin cap”). This could lead to further complexity if the interaction of existing measures is not evaluated thoroughly. In addition, with the implementation of Pillar 2, the effective tax rates could be pushed further down by giving another allowance.

    We invite you to read the Opinion Statement and would welcome any feedback or queries concerning the position paper.

     

    Download the statement.