UEL opinion statement on the DEBRA proposal for a Directive
UEL has issued an opinion statement in response to the EU Commission public consultation on a proposal for a Directive introducing a debt-equity bias reduction allowance (DEBRA) (hereafter the “EU Proposal”).
The purpose of the EU Commission’s initiative is to encourage companies to finance their investments through equity contributions rather than through debt financing by addressing the tax-induced debt-equity bias across the single market in a coordinated way. The EU Proposal therefore provides for the deductibility for tax purposes of notional interest on increases in equity (via the introduction of an equity allowance) and for a further limitation of the tax deductibility of interest payments.
UEL and the Luxembourg business sectors it represents generally support the EU Commission’s long-term vision to provide a fair and sustainable tax system and the objective of the EU Proposal to address the debt-equity bias by removing taxation as a factor that can influence companies’ funding decisions.
However, we do not support the idea of restricting interest deductions on debt further when there are already interest deduction limitation rules in place across EU countries. In addition, overly restricting interest deductions would disproportionately impact companies that have more difficulties accessing equity markets, such as SMEs.
Besides, we are afraid that the conditions and anti-abuse rules set for taxpayers to benefit from the equity allowance are such that the EU Proposal may not reach its objective of effectively encouraging equity financing.
Consequently, UEL is concerned that the EU Proposal will not allow to achieve the sought-after balance between debt and equity financing. We therefore believe that the EU Proposal must be amended to ensure that the equity allowance is made more effective and that it does not further restrict interest deductions.