Debt-equity bias reduction allowance (DEBRA)

Briefing 04-10-2022

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. On 11 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. First edition. The 'EU Legislation in Progress' briefings are updated at key stages throughout the legislative procedure.