3. Tax
  5. European Union: European Commission proposes a Debt/Equity Bias Reduction Allowance (DEBRA) Council Directive on laying down rules on DEBRA and limiting the deductibility of interest

European Union: European Commission proposes a Debt/Equity Bias Reduction Allowance (DEBRA) Council Directive on laying down rules on DEBRA and limiting the deductibility of interest

Proposal for a Council Directive on laying down rules on DEBRA and limiting the deductibility of interest
14 Jun 2022    1 minute read
Debt Equity

In brief

On 11 May, 2022, the European Commission ("Commission") published a proposal for a Directive to address the asymmetry in tax treatment between debt financing and equity financing by creating a Debt Equity Bias Reduction Allowance ("DEBRA"). The proposal for a Directive follows the initial announcement of this initiative on 18 May 2021.

The DEBRA rules consists of the following two measures:

  • an allowance on the deduction for tax purposes of notional interest on equity ("allowance on equity"); and
  • a limitation on the tax deductibility of borrowing costs ("interest deduction").

The measures apply to all taxpayers that are subject to corporate income tax ("CIT") in one or more Member States.

Once adopted, the proposed Directive should enter into force on 1 January 2024. The DEBRA rules should therefore be implemented into the national law of all European Union ("EU") member states before 31 December 2023. However, as the proposal for a Directive is a tax measure, which requires unanimous consent, the EU Member States first need to reach agreement on the proposed Directive.

Contents

Key takeaways

  • An allowance on equity is proposed, which consists of the allowance base multiplied by the notional interest rate;
  • Deductibility of the allowance is limited to 30% of the taxpayers EBITDA;
  • The allowance will be deductible for 10 consecutive tax periods;
  • Anti-abuse measures are included in the proposed Directive regarding the origin of any equity increase. These anti-abuse provisions are included to ensure that companies do not increase their equity to achieve a higher allowance on equity;
  • The limitation on interest deductions limits the deductibility of interest to only 85% of the exceeding borrowing costs (i.e. interest paid minus the interest received);
  • The introduction of the limitation on interest deduction under the DEBRA-rules, does not impact the existing interest deduction limitations under ATAD 1. After the application of the DEBRA-rules, the interest deduction limitation under ATAD 1 should still be applied;
  • The proposed Directive is still subject to feedback, so it is not certain yet what the final form of the DEBRA rules will look like. However, once adopted, the allowance on equity and the limitation on interest deduction will affect every taxpayer in the EU.

Read the full alert

Contact Information
Mounia Benabdallah
Principal at BakerMcKenzie
New York
Read my Bio
mounia.benabdallah@bakermckenzie.com
Wouter Diederen
Senior Associate at BakerMcKenzie
Amsterdam
Read my Bio
wouter.diederen@bakermckenzie.com
Marijn van Dijk
Associate at BakerMcKenzie
Amsterdam
Read my Bio
marijn.vandijk@bakermckenzie.com

Copyright © 2024 Baker & McKenzie. All rights reserved. Ownership: This documentation and content (Content) is a proprietary resource owned exclusively by Baker McKenzie (meaning Baker & McKenzie International and its member firms). The Content is protected under international copyright conventions. Use of this Content does not of itself create a contractual relationship, nor any attorney/client relationship, between Baker McKenzie and any person. Non-reliance and exclusion: All Content is for informational purposes only and may not reflect the most current legal and regulatory developments. All summaries of the laws, regulations and practice are subject to change. The Content is not offered as legal or professional advice for any specific matter. It is not intended to be a substitute for reference to (and compliance with) the detailed provisions of applicable laws, rules, regulations or forms. Legal advice should always be sought before taking any action or refraining from taking any action based on any Content. Baker McKenzie and the editors and the contributing authors do not guarantee the accuracy of the Content and expressly disclaim any and all liability to any person in respect of the consequences of anything done or permitted to be done or omitted to be done wholly or partly in reliance upon the whole or any part of the Content. The Content may contain links to external websites and external websites may link to the Content. Baker McKenzie is not responsible for the content or operation of any such external sites and disclaims all liability, howsoever occurring, in respect of the content or operation of any such external websites. Attorney Advertising: This Content may qualify as “Attorney Advertising” requiring notice in some jurisdictions. To the extent that this Content may qualify as Attorney Advertising, PRIOR RESULTS DO NOT GUARANTEE A SIMILAR OUTCOME. Reproduction: Reproduction of reasonable portions of the Content is permitted provided that (i) such reproductions are made available free of charge and for non-commercial purposes, (ii) such reproductions are properly attributed to Baker McKenzie, (iii) the portion of the Content being reproduced is not altered or made available in a manner that modifies the Content or presents the Content being reproduced in a false light and (iv) notice is made to the disclaimers included on the Content. The permission to re-copy does not allow for incorporation of any substantial portion of the Content in any work or publication, whether in hard copy, electronic or any other form or for commercial purposes.

HighQ
Copyright Baker McKenzie 2024 | Disclaimers | Supplemental Privacy Statement