EU Fee Points Draft DEBRA Directive Offering A Debt-equity Bias Discount Allowance – Tax Authorities

On 11 May 2022, the EU Commission issued a draft directive proposing
a debt-equity bias reduction allowance (the “DEBRA
“). 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


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

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

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

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

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

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.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.