EU Commission Issues Draft DEBRA Directive Providing A Debt-equity Bias Reduction Allowance

On 11 May 2022, the EU Commission issued a draft directive proposing a debt-equity bias reduction allowance (the "DEBRA Proposal"). The DEBRA Proposal lays down rules (i) to provide, under certain conditions, for the tax deductibility of notional interest on increases in equity and (ii) to limit the tax deductibility of exceeding borrowing costs. It applies to all taxpayers that are subject to corporate income tax in one or more Member States, except for financial undertakings.

The DEBRA Proposal would have to be implemented and applied by Member States from 1 January 2024, and is expected to have a significant impact on EU corporate taxpayers.

Context

The DEBRA Proposal is a follow-up to the EU Communication on Business Taxation for the 21^st Century of May 2021, which sets out a long-term vision to provide a fair and sustainable business environment and EU tax system, as well as targeted measures to promote productive investment and entrepreneurship