EU Commission issues draft DEBRA directive providing a debt-equity bias reduction allowance

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The DEBRA Proposal applies to all taxpayers that are subject to corporate income tax in one or more Member States, except for financial undertakings.

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.


The DEBRA Proposal is a follow-up to the EU Communication on Business Taxation for the 21st 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 and ensure effective taxation. DEBRA is one of those measures.

More details on the context can be found here_

Summary of the proposed rules

The DEBRA Proposal includes two separate measures that apply independently: (i) an equity allowance and (ii) a limit on interest deduction.


The DEBRA Proposal applies to all taxpayers subject to corporate income tax in one or more Member States.

It does not apply to financial undertakings, such as credit institutions, investment firms, AIFs, AIFMs, UCITS, UCITS management companies, insurance and reinsurance undertakings, pension institutions, securitisation vehicles (covered by Regulation (EU) No 2017/2402) and crypto-asset service providers.

Equity allowance

The equity allowance is computed by multiplying the allowance base by the relevant notional interest rate.

The allowance base is the difference between net equity at the end of the tax year and net equity at the end of the previous tax year. Equity includes the paid-up capital, share premium accounts, reserves and profits or losses carried forward. Net equity is the difference between a taxpayer’s equity and the sum of the tax value of its participation in the capital of associated enterprises (broadly requiring a 25% participation) and of its own shares. According to the explanatory memorandum of the DEBRA Proposal, this definition is meant to prevent cascading the allowance through participations.

The notional interest rate is the 10-year risk-free interest rate for the relevant currency increased by a risk premium of 1% (1.5% for SMEs). The Commission will have the power to modify the risk premium rate under specific conditions by adopting delegated acts.

The allowance is granted for ten years, i.e. it will be deductible in the year it was incurred and in the next successive nine years.

If the allowance base of a taxpayer that has already benefitted from an equity allowance is negative in a given tax period (equity decrease), a proportionate amount will become taxable for ten consecutive tax periods, up to the total increase of net equity for which the allowance has been obtained, unless the taxpayer provides evidence that this is due to losses incurred during the tax period or due to a legal obligation.

The allowance deduction is capped at 30% of the taxpayer’s EBITDA (earnings before interest, tax, depreciation and amortisation) for each tax year.

A taxpayer will be able to carry forward, without time limitation, the part of the equity allowance that could not be deducted in a tax year due to insufficient taxable profit.

In addition, the taxpayer will be able to carry forward, for up to five years, unused allowance capacity (where the equity allowance does not reach the 30% maximum mentioned above).

Anti-abuse rules

The allowance base will not include equity increases that result from any of the following transactions:

– Intra-group loans, intra-group transfers of participations or existing business activities and cash contributions from a person resident in a jurisdiction that does not exchange information with the taxpayer’s Member State. This anti-abuse measure addresses abusive schemes that would cascade the allowance within a group, and will not apply where the transaction was carried out for valid commercial reasons and does not lead to a double deduction of the equity allowance.

– Contributions in kind or investment in an asset, where the asset is not necessary for the performance of the taxpayer’s income-generating activity. This measure aims to prevent the overvaluation of assets or purchase of luxury goods for the purpose of increasing the allowance base.

– Reorganisation of a group that results in converting into new equity the equity that already existed in the group before the reorganisation.

Limitation on interest deduction

The DEBRA Proposal provides for an interest limitation rule, which would be applied in parallel with the existing interest limitation rule provided for in Article 4 of Council Directive (EU) 2016/1164 (the “ATAD”). The rule in the DEBRA Proposal would apply first, meaning that where the ATAD rule produced a lower interest deduction allowance, the taxpayer would be entitled to carry forward or back the difference in accordance with Article 4 of ATAD.

Next steps

The DEBRA Proposal must now be unanimously agreed upon by Member States in the Council.

As the rules would apply from 1 January 2024 (except for Belgium, Cyprus, Italy, Malta, Poland and Portugal, six Member States with similar rules that would be granted a 10-year grandfathering period), corporate taxpayers operating in the EU have a relatively short time to assess the impact on their operations.

These taxpayers should also bear in mind other initiatives that the EU Commission has recently issued or intends to issue in the coming months and years. Among others, these include the Unshell Proposal and the Pillar II Proposal issued in December 2021 (see our Newsflash for details), the presentation of a new initiative to respond to the challenges linked to non-EU shell entities, another proposal requiring large groups to publish their effective tax rates, and the new framework for business taxation in the EU (BEFIT).

How can we help?

The Tax Law partners and your usual contacts at Arendt & Medernach are at your disposal to further assess and advise on the impact of the DEBRA Proposal on your operations.

Download the press release

Luxembourg Newsflash – eu commission issues draft debra dir

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