POSITION | TAX POLICY | CORPORATE FINANCE
Debt Equity Bias Reduction Allowance German industry’s position on the EU Commission’s proposal
October 20, 2022 Executive Summary On 11 May 2022, the European Commission published a proposal for a debt-equity bias reduction allowance (DEBRA) to address the debt-equity bias in taxation, and, on a broader level, to support the integration of European capital markets by reducing tax obstacles which continue to impede crossborder investment in the EU and the functioning of the single market. As a general principle, German industry welcomes the European Commission’s efforts to address and mitigate the debt-equity bias in taxation. An equal tax treatment of investments that are funded through equity financing by making them tax deductible like debt financing arrangements can improve the resilience of businesses during economic downturns and support European businesses’ capital structures, foster investment and longterm growth. This is becoming increasingly important since economic recovery is halting, and German industry is heading for a severe recession. However, introducing an allowance for incremental equity and disallowing a share of interest payment for all debt at the same time cannot be considered as a balanced approach to addressing the debtequity bias in taxation. This is especially true in current times where increasing economic and political uncertainty is accompanied by recent and forthcoming decisions of the European Central Bank to raise interest rates in order to fight inflation. Higher interest rates are pushing up investment costs already, and disallowing interest deductions will further increase costs and disproportionately reduce investment incentives. A new strict interest deductibility regime would therefore have severe consequences for the European economy. Given that large investments will be needed from the public as well as the private sectors to overcome recession and to achieve the green and digital transformation, these economic consequences would be even more problematic. In this context, tax incentives are a useful tool to steer desired behaviour and foster private investment. As we feel that the current proposal is not sufficiently well thought out from a more general tax systemic perspective, we call on the European Commission to embed the DEBRA initiative in a broader concept which strives for an administrative simplification of European tax law. From a German industry point of view, an allowance on new corporate equity would be the most appropriate method as it would support equity financing as a further financing option available to businesses and thereby boost investment and economic growth without creating any kind of distortions. BDI, however, cannot support a measure that would create a competitive disadvantage for European businesses.
Philipp Gmoser | Tax and Financial Policy | T: +32 2 792 1012 | p.gmoser@bdi.eu | www.bdi.eu