Debt-equity bias reduction allowance (DEBRA)

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 on loans generally being tax deductible. In contrast, costs relating to equity financing, such as dividends, are mostly non-tax deductible. This unequal treatment of debt and equity leads to a bias towards debt in businesses' investment decisions and can lead to high levels of indebtedness in the EU 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 in the EU, the European Commission tabled a proposal for a debt–equity bias reduction allowance (DEBRA). The directive introduces both a tax allowance on increases in company equity and a limitation of the tax deductibility of interest payments. To enter into force, the proposal requires the Council's unanimous support, following consultation of the European Parliament and the European Economic and Social Committee. In December 2022, the Council stated that negotiations would be temporarily 'suspended' and reassessed at a later stage in the broader context of other upcoming reforms in the area of corporate taxation. The European Parliament is expected to vote on its (non-binding) report during its January 2024 plenary session. Third edition. The 'EU Legislation in Progress' briefings are updated at key stages throughout the legislative procedure.