EU proposes tax incentive for equity to help firms grow. Excessive debt levels make companies vulnerable to unforeseen changes, says European Commission.
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The European Commission announced on Wednesday that it had proposed a tax incentive for equity to help companies grow and become more resilient.
The measure, which is called a debt-equity bias reduction allowance, or DEBRA, aims to help businesses access the financing they need by introducing an allowance that grants equity the same tax treatment as debt.
In addition, increases in a taxpayer's equity from one tax year to the next will be deductible from its taxable base, if the measure is adopted.
In a statement, the commission stressed that excessive debt levels make companies vulnerable to unforeseen changes, adding that therefore, "reducing the over-reliance on debt-financing, and supporting a possible rebalancing of companies' capital structure, can positively affect competitiveness and growth."
It noted that total indebtedness of non-financial corporations in the EU amounted to almost €14.9 trillion ($15.7 trillion) in 2020, or 111% of the union's total GDP.
"This harmonised solution to the debt-equity bias will make Europe's business environment more predictable and competitive, spurring the development of our capital markets union," the statement quoted Commissioner for Economy Paolo Gentiloni as saying.
"Our proposal will help companies build up more solid capital, making them less vulnerable and more likely to invest and take risks. And that will be good news for jobs and growth in Europe," he added.
The European Commission has today proposed a debt-equity bias reduction allowance, or DEBRA, to help businesses access the financing they need and to become more resilient. This measure will support businesses by introducing an allowance that will grant to equity the same tax treatment as debt. The proposal stipulates that increases in a taxpayer's equity from one tax year to the next will be deductible from its taxable base, similarly to what happens to debt.
This initiative is part of the EU strategy on business taxation, which aims to ensure a fair and efficient tax system across the EU, and contributes to the Capital Markets Union, making financing more accessible to EU business and promoting the integration of national capital markets into a genuine single market.
The current pro-debt bias of tax rules, where businesses can deduct interest attached to a debt financing – but not the costs related to equity financing – can incentivise companies to take on debt rather than increase equity to finance their growth. Excessive debt levels make companies vulnerable to unforeseen changes in the business environment. The total indebtedness of non-financial corporations in the EU amounted to almost €14.9 trillion in 2020 or 111% of GDP. Against this background, it is worth stressing that businesses with a solid capital structure may be less vulnerable to shocks, and more prone to make investments and innovate. Therefore, reducing the over-reliance on debt-financing, and supporting a possible rebalancing of companies' capital structure, can positively affect competitiveness and growth. The combined approach of equity allowance and limited interest deduction is expected to increase investments by 0.26% of GDP and GDP by 0.018%.
Paolo Gentiloni, Commissioner for Economy, said: “In these dark and uncertain times, we must act not only to help our companies cope with their immediate challenges, but also to support their future development. Today we are taking action to make the tax advantages of equity comparable to those of debt for firms wanting to raise capital. We want to give a shot in the arm to innovative start-ups and SMEs throughout the EU. This harmonised solution to the debt-equity bias will make Europe's business environment more predictable and competitive, spurring the development of our capital markets union. Our proposal will help companies build up more solid capital, making them less vulnerable and more likely to invest and take risks. And that will be good news for jobs and growth in Europe.”
The green and digital transition requires new investments in innovative technologies. Taxation has an important role to play in encouraging and enabling businesses to develop and grow sustainably. An allowance for equity financing can facilitate bold investments in cutting-edge technologies, notably for start-ups and SMEs. Equity is particularly important for fast-growing innovative companies in their early stages and scale-ups willing to compete globally.
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