Considerations on COM(2022)216 - Laying down rules on a debt-equity bias reduction allowance and on limiting the deductibility of interest for corporate income tax purposes - Main contents
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| dossier | COM(2022)216 - Laying down rules on a debt-equity bias reduction allowance and on limiting the deductibility of interest for corporate ... |
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| document | COM(2022)216  |
| date | May 11, 2022 |
(2) Member States’ tax systems allow the taxpayers to deduct interest payments on debt financing, and thereby reduce the corporate income tax liability, while costs related to equity financing are non-tax deductible in most Member States. The asymmetric tax treatment of debt and equity financing across the Union induces a bias towards debt in investment decisions. Moreover, where Member States provide for a tax allowance on equity financing in their domestic law, such national measures differ significantly in terms of policy design.
(3) In order to remove possible tax related distortions among Member States, it is necessary to lay down a common framework of rules to address the tax related debt-equity bias across the Union in a coordinated manner. Such rules should ensure that equity and debt financing are treated in a similar way for tax purposes across the single market. At the same time, a common Union legislative framework should be sustainable also in the short term for Member States’ budgets. Such framework should therefore include rules, on the one hand, for the tax deductibility of equity financing costs and, on the other, for limiting the tax deductibility of debt financing costs.
(4) To ensure a simple and comprehensive legislative framework, the common framework of rules should apply to all undertakings in the Union that are subject to corporate income tax in a Member State. Financial undertakings have special features and require a specific treatment. If the rules to address the tax related debt-equity bias were to apply to them, the economic burden of the measures would be unequally distributed at the expense of non-financial undertakings. Financial undertakings should therefore be excluded from the scope of this Directive.
(5) To neutralise the bias against equity financing, an allowance should be envisaged so that increases in a taxpayer's equity from one tax period to the next are deductible from its taxable base, subject to certain conditions. The allowance should be calculated by multiplying the increase in equity with a notional interest rate based on risk-free interest rate as laid down in the implementing acts adopted pursuant to Article 77e(2) of Directive 2009/138/EC. Such risk-free interest rates are already part of EU law and have been practically and effectively applied as such. Any part of the allowance that cannot be deducted in a tax period due to insufficient taxable profits may be carried forward. Taking into account the specific challenges that small- and medium-sized enterprises (SMEs) face in accessing capital markets, an increased allowance on equity should be envisaged for taxpayers that are SMEs. In order for the deduction of an allowance on equity to be sustainable for public finances in the short term, it should be limited in time. To safeguard the system from abuses, it is necessary to exclude the tax value of a taxpayer's own shares as well as that of its participation in associated enterprises from the calculation of changes in equity. In the same vein, it is necessary to provide for the taxation of a decrease in a taxpayer’s equity from one tax period to the following one, to prevent an equity increase from being effected in an abusive manner. Such a rule would also encourage the retention of a level of equity. It would apply so that where there is a decrease in equity of a taxpayer that has benefitted from an allowance on equity increase, an amount calculated in the same way as the allowance would become taxable for 10 tax periods; unless the taxpayer provides evidence that this decrease is exclusively due to losses incurred during the tax period or due to a legal obligation.
(6) In order to avoid a misuse of the deduction of the allowance on equity, it is necessary to lay down specific anti-tax avoidance rules. Such rules should target, in particular, schemes put in place to circumvent the conditions on which an equity increase qualifies for an allowance under this Directive, for instance, through the intra-group transfer of participations in associated enterprises. Such rules should also target schemes put in place to claim an allowance in the absence of any equity increase at group level. For example, intra-group debt financing or contributions in cash could be used for these purposes. Specific anti-tax avoidance rules should also prevent schemes from being put in place to claim that an increase in equity, and the corresponding allowance, is higher than it actually is, for example, through an increase in loan financing receivables or overvaluation of assets. Moreover, the general anti-tax abuse rule in Article 6 of Council Directive (EU) 2016/1164 15 applies against abusive acts which are not covered by the specific anti-tax avoidance framework of this Directive.
(7) To effectively address the tax-related debt-equity bias in a manner sustainable for the Union’s public finances, an allowance for equity financing should be accompanied by a limitation on the deductibility of debt financing costs. An interest limitation rule should therefore limit the deductibility of exceeding borrowing costs and apply independently from the allowance. Given the different objectives between such a rule and the existing anti-tax avoidance rule on interest limitation of Article 4 of Directive (EU) 2016/1164, both rules should be maintained. Taxpayers should first calculate the deductibility of exceeding borrowing costs under this Directive and then under ATAD. In the event that the latter results in a lower amount of deductible exceeding borrowing costs, the taxpayer should deduct this lower amount and carry forward or back any difference between the two amounts in accordance with Article 4 of ATAD.
(8) As the implementation and enforcement of the Union rules in each Member State are critical for safeguarding Member States’ tax bases and, where necessary, for properly reviewing the Union rules, such implementation and enforcement should be monitored by the Commission. Member States should therefore communicate to the Commission, on a regular basis, specific information on the implementation and enforcement in their territory of national measures transposing this Directive.
(9) In order to evaluate the effectiveness of this Directive, the Commission should prepare and publish an evaluation report on the basis of the information provided by Member States and of other available data.
(10) In order to enable the smooth and prompt amendment of certain non-essential elements of this Directive taking into account ongoing developments, the power to adopt acts in accordance with Article 290 of the Treaty on the Functioning of the European Union should be delegated to the Commission, so that the latter can amend this Directive, to modify the level of the risk premium rate as an element for the calculation of the allowance on equity. It is of particular importance that the Commission carry out appropriate consultations during its preparatory work, including at expert level, and that those consultations be conducted in accordance with the principles laid down in the Interinstitutional Agreement of 13 April 2016 on Better Law-Making 16 . In particular, to ensure equal participation in the preparation of delegated acts, the Council should receive all documents at the same time as Member States' experts, and its experts should systematically be given access to meetings of Commission expert groups dealing with the preparation of delegated acts.
(11) Since the objective of this Directive cannot sufficiently be achieved by the Member States but can rather, by reason of the need to provide balanced incentives for business location and entrepreneurship in the single market, be better achieved at Union level, the Union may adopt measures, in accordance with the principle of subsidiarity as set out in Article 5 of the Treaty on European Union. In accordance with the principle of proportionality as set out in that Article, this Directive should not go beyond what is necessary in order to achieve that objective.