In most countries in the European Union (EU) and in the rest of the world, debt is treated more favourably from a tax perspective than equity, with interest payments to loans generally being tax deductible. In contrast, costs related to equity financing, such as dividends, are mostly non-tax deductible. This unequal treatment between debt and equity induces a bias towards debt in businesses' investment decisions and can therefore lead to high levels of indebtedness in the European corporate sector.

In May 2022, to support the creation of a harmonised tax environment that places debt and equity financing on an equal footing across the EU, the European Commission presented a proposal for a debt-equity bias reduction allowance (DEBRA). The DEBRA lays down rules on both a tax allowance on increases in equity and on a limitation of the tax deductibility of interest payments

The equity allowance would be computed based on the difference between net equity at the end of the current tax year and net equity at the end of the previous tax year, multiplied by a notional interest rate. This means that the allowance would be granted only for the sum of equity increases over a specific year. To address the debt equity bias from both the equity and the debt side, the DEBRA contains a new limitation to the tax deductibility of debt-related interest payments: the proposal limits the deductibility of interest to 85% of exceeding borrowing costs (i.e. interest paid minus interest received).

The proposal requires unanimity in the Council for its adoption, following consultation of the European Parliament and the European Economic and Social Committee (special legislative procedure).

The European Economic and Social Committee (EESC) adopted its opinion in October 2022.
In the European Parliament, the file was assigned to the ECON committee (rapporteur: Ludek Niedermayer, Czech Republic, EPP). The European Parliament adopted the (non-binding) report in January 2024.

The Council completed an article-by-article examination, under the Czech Presidency, of the directive in November 2022. In December 2022, the Council stated that the examination of the DEBRA proposal would be 'suspended' and 'if appropriate, it would be reassessed within a broader context only after other proposals in the area of corporate income taxation (...) have been put forward'.

In March 2024, the Eurogroup released a statement on the future of the Capital Markets Union. In this statement, Member States were invited to investigate ways to reduce the debt equity bias (for example through their national tax systems) and share best practices and plans to address this bias. 

In March 2025, in the context of the Savings and Investments Union, the European Commission expressed regret over the persistent debt bias in taxation and noted the Council's lack of progress on DEBRA.

References:

• EP Legislative Observatory, Procedure file on Debt-equity bias reduction allowance and limiting the deductibility of interest for corporate income tax purposes, 2022/0154(CNS)
• European Commission, Proposal for a Council directive on laying down rules on a debt-equity bias reduction allowance and on limiting the deductibility of interest for corporate income tax purposes, May 2022
• European Commission, DEBRA, website
• European Economic and Social Committee, Opinion on the proposal for a debt equity bias reduction allowance, October 2022
• Council of the EU, Ecofin Report to the European Council on tax issues, November 2022
• European Parliament, Report on the proposal to tackle the debt-equity bias in taxation (DEBRA), January 2024
• Eurogroup, Statement of the Eurogroup in inclusive format on the future of Capital Markets Union, March 2024
• European Commission, Communication on Savings and Investments Union, March 2025
  

Further reading:

• European Parliamentary Research Service, Debt-Equity Bias Reduction Allowance (DEBRA), Legislative Briefing, July 2024

Author: Pieter Baert, Members' Research Service, legislative-train@europarl.europa.eu