EU Debt-Equity Bias Reduction Directive

On May 11, 2022, the European Commission issued a legislative proposal titled “Rules to Address the Debt-Equity Bias Reduction Allowance and on Limiting the Deductibility of Interest for Corporate Income Tax Purposes.” This proposal introduces the Debt-Equity Bias Reduction Allowance (DEBRA) and further tightens restrictions on the deductibility of corporate interest expenses.

The EU has three main objectives in pushing forward this legislation:

1. To address the asymmetry in the tax treatment of debt and equity.
2. To encourage companies to choose equity over debt as a source of shareholder funding, fostering healthier corporate development.
3. To harmonize the tax treatment of debt and equity across EU member states.

Before diving into the details of the EU directive, let’s first briefly explain the differences between debt and equity. Without this context, it would be difficult to fully understand the essence of DEBRA and the potential challenges it may pose.