DEBRA — Debt-Equity Bias Reduction Allowance (Directive on equity allowance and interest deduction limitation)

DEBRA (Debt-Equity Bias Reduction Allowance) is a European Commission proposal for a directive aimed at eliminating the tax advantage that debt financing holds over equity financing across the EU. Most tax systems allow interest deductions but not a notional return on equity, incentivising excessive leverage and threatening financial stability.

• Allowance on equity (AoE): Notional interest deduction on incremental equity over a ten-year period
• Limitation on deductibility of exceeding borrowing costs: Deductibility of exceeding borrowing costs limited to 85 %
• Parallel application with ATAD: The 85 % limitation applies in parallel with the ATAD interest limitation rule (Art. 4 ATAD); the lower result prevails
• Anti-avoidance: Safeguard clauses prevent artificial equity inflation within corporate groups

The concept of a notional interest deduction (NID) on equity was pioneered in Belgium (since 2006), Cyprus, Turkey and other countries. At the time of the proposal, six EU Member States had their own measures: Belgium, Portugal, Poland, Cyprus, Malta and Italy. At EU level, the 2011 Green Paper on corporate taxation recommended an EU-wide CCTB/CCCTB approach. Within the Capital Markets Union agenda and the business taxation agenda, the Commission formally tabled the DEBRA proposal (COM(2022) 216) on 11 May 2022. Council discussions have progressed slowly and agreement remains outstanding.

DEBRA would apply to all corporate taxpayers in the EU subject to corporate income tax, with carve-outs for financial undertakings (including credit institutions, investment firms, insurance and reinsurance undertakings, payment institutions, e-money institutions, AIFMs, UCITS management companies, crypto-asset service providers — 19 categories per Art. 2). Group companies may be able to apply the rules on a consolidated basis. Member States may provide favourable exceptions for SMEs.

• Equity increase (year-end minus prior year) as the base for the notional interest deduction
• Reference rate = 10-year risk-free interest rate (Solvency II) for the relevant currency + 1 % risk premium (+ 1.5 % for SMEs)
• Deductible over ten consecutive tax years
• Equity allowance capped at 30 % of EBITDA per tax year
• Exceeding borrowing costs: deductibility limited to 85 % (for costs incurred after entry into force)
• Parallel application with ATAD interest limitation rule (Art. 4 ATAD): the lower result prevails
• Anti-avoidance clause: intra-group equity transfers are netted out

3 corrections:
- Reference rate incorrect: '10-year swap rate' instead of '10-year risk-free interest rate'
- Originally planned transposition date wrong: 2024, not 2023
- Debt limitation incorrectly described: no gradual decline to 0%
2 updates:
- Misleading key_date: Czech Presidency started 01.07.2022, not specific to DEBRA Council discussions
- Missing key_dates: EP committee vote and EP plenary vote
7 clarifications.
1 note.