The European Economic and Social Committee (EESC) has published its opinion on the European Commission's Proposal for a Council Directive introducing a debt-equity bias reduction allowance (DEBRA). As previously reported, the allowance is meant to incentivize equity investment, rather than debt, by providing that increases in a taxpayer's equity from one tax year to the next will be deductible from its taxable base, similar to what happens with debt. The allowance would be computed based on the difference between net equity at the end of the current tax year and net equity at the end of the previous tax year, multiplied by a notional interest rate. The notional interest rate is the 10-year risk-free interest rate for the relevant currency, increased by a risk premium of 1% or, in the case of SMEs, a risk premium of 1.5%. The allowance is deductible for 10 consecutive tax years, as long as it does not exceed 30% of the taxpayer's taxable income. If the allowance is higher than the taxpayer's net taxable income, the taxpayer may carry forward the excess allowance without a time limitation. Taxpayers will also be able to carry forward their unused allowance that exceeds 30% of taxable income, for a maximum of 5 tax years. On the debt side, the proposal also introduces a reduction of debt interest deductibility by 15%.

The key points of the EESC opinion are provided as follows:

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The EESC:

• deems that the Commission decision to favour equity over debt not only by granting an allowance on the equity capital increased by companies over time, but also by reducing the deductibility of debt weighing on companies by 15%, might harm European businesses, especially SMEs;
• is concerned that the Commission proposal could make SMEs and micro-businesses, the backbone of the European economy, financially weaker. Such companies do not have easy access to capital markets and, therefore, limiting the deductibility of their interest costs could hamper investment, growth and job creation across Europe;
• maintains that, in the case of small and micro-enterprises, the encouragement towards equity should be pursued mainly, if not only, by tax allowances on equity without penalising the deductibility of interest on debt;
• considers the risk premium of 1 to 1.5% contained in the Commission proposal to be both disconnected from the market reality and insufficient to compensate for the loss of interest costs' deductibility. In 2021, the Market Risk Premium (MRP) was above 5 per cent in all Member States and currently remains at those levels;
• fears that not allowing deduction for legitimate costs of doing business in the form of interest charges might put European companies at a competitive disadvantage compared to businesses in other major trading blocs;
• notes that disallowing deducibility of interest charges for European companies would create incentives to use leasing arrangements rather than having companies directly investing in machinery and equipment;
• suggests that the Commission substantially reconsider its proposal, including a total or partial exemption from the limitations to debt interest deductibility especially in favour of SMEs and micro-enterprises.