(1)

Promoting a fair and sustainable business environment, including through targeted tax measures that incentivise investment and growth, is a high political priority of the Union. To support sustainable and long-term corporate financing, the tax system should minimise unintended distortions of business decisions, for example towards debt rather than equity financing. While the Commission’s Capital Markets Union 2020 Action Plan (14) includes important actions to support such financing, for example Action 4 - Encouraging more long-term and equity financing from institutional investors, targeted tax measures should be adopted in order to enhance such actions. Such measures should take into account fiscal sustainability considerations.

(1)

Promoting a fair and sustainable business environment and improving the corporate tax system , including through targeted tax measures that incentivise investment and growth, is a high political priority of the Union. To support sustainable , robust and long-term corporate financing, in particular after the three economic crises since 2008, with many companies having to rely on debt financing in order to cover economic losses , the tax system should minimise unintended distortions of business decisions, for example towards debt rather than equity financing. While the Commission’s Capital Markets Union 2020 Action Plan (14) includes important actions to support such financing, for example Action 4 - Encouraging more long-term and equity financing from institutional investors, targeted tax measures should be adopted in order to enhance such actions. Such measures should take into account fiscal sustainability considerations.

(1a)

The promotion of a competitive and resilient capital markets union, with a strong equity market as one of its pillars, is essential for the promotion of jobs, economic growth and investment. More private investment through equity is needed in order to tackle the economic challenges that lie ahead. Therefore, the creation of a legal instrument to harmonise existing legislative provisions for reducing taxpayers’ bias towards debt when making investment choices, without prejudice to the legitimate and effective use of debt instruments, is strongly advisable.

(2)

Member States’ tax systems allow the taxpayers to deduct interest payments on debt financing, and thereby reduce the corporate income tax liability, while costs related to equity financing are non-tax deductible in most Member States. The asymmetric tax treatment of debt and equity financing across the Union induces a bias towards debt in investment decisions. Moreover, where Member States provide for a tax allowance on equity financing in their domestic law, such national measures differ significantly in terms of policy design.

(2)

Member States’ tax systems allow the taxpayers to deduct interest payments on debt financing, and thereby reduce the corporate income tax liability, while costs related to equity financing are non-tax deductible in most Member States. The asymmetric tax treatment of debt and equity financing across the Union induces a bias towards debt in investment decisions. The recent crises associated with the debt problems of companies in the internal market demonstrated that there is a need for a reform that puts equity and debt on equal footing and brings an end to the advantage of debt financing. This Directive is an answer to the numerous calls by Parliament to address the tax-related debt-equity bias  (1a) . Moreover, where Member States provide for a tax allowance on equity financing in their domestic law, such national measures differ significantly in terms of policy design. It is therefore essential to safeguard a level playing field for equity solutions and debt instruments, having regard to the need to guarantee minimum levels of systematic coherence between national tax frameworks, namely at the level of tax benefits.

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the European Parliament resolution of 8 October 2020 on further development of the Capital Markets Union (CMU): improving access to capital market finance, in particular by SMEs, and further enabling retail investor participation (2020/2036(INI)) (OJ C 395, 29.9.2021, p. 89);

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the European Parliament legislative resolution of 15 March 2018 on the proposal for a Council directive on a Common corporate tax base (2016/0337(CNS)) (OJ C 162, 10.5.2019, p. 181);

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the European Parliament resolution of 10 March 2022 with recommendations to the Commission on fair and simple taxation supporting the recovery strategy (EP follow-up to the July Commission’s Action Plan and its 25 initiatives in the area of VAT, business and individual taxation) (2020/2254(INL)) (OJ C 347, 9.9.2022, p. 211);

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the European Parliament resolution of 15 February 2022 on the impact of national tax reforms on the EU economy (2021/2074(INI)) (OJ C 342, 6.9.2022, p. 14).

(3)

In order to remove possible tax related distortions among Member States, it is necessary to lay down a common framework of rules to address the tax related debt-equity bias across the Union in a coordinated manner. Such rules should ensure that equity and debt financing are treated in a similar way for tax purposes across the single market. At the same time, a common Union legislative framework should be sustainable also in the short term for Member States’ budgets. Such framework should therefore include rules, on the one hand, for the tax deductibility of equity financing costs and, on the other, for limiting the tax deductibility of debt financing costs.

(3)

In order to remove possible tax related distortions among Member States, it is necessary to lay down a common framework of rules to address the tax related debt-equity bias across the Union in a coordinated manner , while respecting in full the Union’s institutional framework on tax matters as established by the Treaties . Such rules should ensure that equity and debt financing are treated in a similar way for tax purposes across the single market. At the same time, given the extensive tax deductibility of debt and the fact that creating an allowance on increases in equity could have a direct impact on public revenues, a common Union legislative framework should be sustainable also in the short term for Member States’ budgets. Such framework should therefore include rules, on the one hand, for the tax deductibility of equity financing costs and, on the other, for limiting the tax deductibility of debt financing costs. This Directive aims to strike a better balance between the different challenges related to the sustainability of Member States’ public finances in the short term and, in doing so, should avoid Member States incurring substantial losses in revenues and aim to improve companies’ financial stability.

(3a)

In order to further develop the capital markets union, this Directive aims to diversify funding sources for Union companies, especially for SMEs. Therefore, it should avoid creating new costs and barriers in respect of access to financing for those companies that cannot yet easily access capital markets. Limiting the deductibility of those companies’ interest costs could hamper investment across the Union, hence the interest deduction should not be limited for SMEs and medium-sized groups.

(5)

To neutralise the bias against equity financing, an allowance should be envisaged so that increases in a taxpayer's equity from one tax period to the next are deductible from its taxable base, subject to certain conditions. The allowance should be calculated by multiplying the increase in equity with a notional interest rate based on risk-free interest rate as laid down in the implementing acts adopted pursuant to Article 77e(2) of Directive 2009/138/EC. Such risk-free interest rates are already part of EU law and have been practically and effectively applied as such. Any part of the allowance that cannot be deducted in a tax period due to insufficient taxable profits may be carried forward. Taking into account the specific challenges that small- and medium-sized enterprises (SMEs) face in accessing capital markets, an increased allowance on equity should be envisaged for taxpayers that are SMEs. In order for the deduction of an allowance on equity to be sustainable for public finances in the short term, it should be limited in time. To safeguard the system from abuses, it is necessary to exclude the tax value of a taxpayer's own shares as well as that of its participation in associated enterprises from the calculation of changes in equity. In the same vein, it is necessary to provide for the taxation of a decrease in a taxpayer’s equity from one tax period to the following one, to prevent an equity increase from being effected in an abusive manner. Such a rule would also encourage the retention of a level of equity. It would apply so that where there is a decrease in equity of a taxpayer that has benefitted from an allowance on equity increase, an amount calculated in the same way as the allowance would become taxable for 10 tax periods; unless the taxpayer provides evidence that this decrease is exclusively due to losses incurred during the tax period or due to a legal obligation.

(5)

To neutralise the bias against equity financing, an allowance should be envisaged so that increases in a taxpayer's equity from one tax period to the next are deductible from its taxable base, subject to certain conditions. The allowance should be calculated by multiplying the increase in equity with a notional interest rate based on risk-free interest rate as laid down in the implementing acts adopted pursuant to Article 77e(2) of Directive 2009/138/EC. Such risk-free interest rates are already part of EU law and have been practically and effectively applied as such. Any part of the allowance that cannot be deducted in a tax period due to insufficient taxable profits may be carried forward. Taking into account the specific challenges that small- and medium-sized enterprises (SMEs) and medium-sized groups face in accessing capital markets , their higher financing costs, the lower availability of capital and the higher probability of them experiencing longer periods of losses , an increased allowance on equity as well as a longer period for tax deductibility should be envisaged for taxpayers that are SMEs or medium-sized groups . In order for the deduction of an allowance on equity to be sustainable for public finances in the short term, it should be properly and proportionately limited in time. To safeguard the system from abuses, it is necessary to exclude the tax value of a taxpayer's own shares as well as that of its participation in associated enterprises from the calculation of changes in equity. In the same vein, it is necessary to provide for the taxation of a decrease in a taxpayer’s equity from one tax period to the following one, to prevent an equity increase from being effected in an abusive manner. Such a rule would also encourage the retention of a level of equity. It would apply so that where there is a decrease in equity of a taxpayer that has benefitted from an allowance on equity increase, an amount calculated in the same way as the allowance would become taxable for 10 tax periods for SMEs and medium-sized groups and for 7 consecutive tax periods for any taxpayer other than an SME or a medium-sized group, unless the taxpayer provides evidence that this decrease is exclusively due to losses incurred during the tax period or due to a legal obligation. The Commission and Member States should implement information and communication actions relating to this Directive, especially as regards its possibilities and benefits for SMEs.

(6)

In order to avoid a misuse of the deduction of the allowance on equity, it is necessary to lay down specific anti-tax avoidance rules. Such rules should target, in particular, schemes put in place to circumvent the conditions on which an equity increase qualifies for an allowance under this Directive, for instance, through the intra-group transfer of participations in associated enterprises. Such rules should also target schemes put in place to claim an allowance in the absence of any equity increase at group level. For example, intra-group debt financing or contributions in cash could be used for these purposes. Specific anti-tax avoidance rules should also prevent schemes from being put in place to claim that an increase in equity, and the corresponding allowance, is higher than it actually is, for example, through an increase in loan financing receivables or overvaluation of assets. Moreover, the general anti-tax abuse rule in Article 6 of Council Directive (EU) 2016/1164 (15) applies against abusive acts which are not covered by the specific anti-tax avoidance framework of this Directive.

(6)

In order to avoid a misuse of the deduction of the allowance on equity, it is necessary to lay down specific anti-tax avoidance rules. Such rules should target, in particular, schemes put in place to circumvent the conditions on which an equity increase qualifies for an allowance under this Directive, for instance, through the intra-group transfer of participations in associated enterprises. Such rules should also target schemes put in place to claim an allowance in the absence of any equity increase at group level. For example, intra-group debt financing or contributions in cash could be used for these purposes. Specific anti-tax avoidance rules should also prevent schemes from being put in place to claim that an increase in equity, and the corresponding allowance, is higher than it actually is, for example, through an increase in loan financing receivables or overvaluation of assets. Moreover, the general anti-tax abuse rule in Article 6 of Council Directive (EU) 2016/1164 (15) applies against abusive acts which are not covered by the specific anti-tax avoidance framework of this Directive. Member States should also ensure that the measures they adopt to transpose this Directive into national law comply with the guidance provided by the Code of Conduct Group (business taxation).

(6a)

The possible fiscal costs arising from the implementation of this Directive should be assessed together with the benefits of ensuring a more robust financing base for Union companies, which would be of utmost importance in cases of financial stress.

(7)

To effectively address the tax-related debt-equity bias in a manner sustainable for the Union’s public finances, an allowance for equity financing should be accompanied by a limitation on the deductibility of debt financing costs. An interest limitation rule should therefore limit the deductibility of exceeding borrowing costs and apply independently from the allowance. Given the different objectives between such a rule and the existing anti-tax avoidance rule on interest limitation of Article 4 of Directive (EU) 2016/1164, both rules should be maintained. Taxpayers should first calculate the deductibility of exceeding borrowing costs under this Directive and then under ATAD. In the event that the latter results in a lower amount of deductible exceeding borrowing costs, the taxpayer should deduct this lower amount and carry forward or back any difference between the two amounts in accordance with Article 4 of ATAD.

(7)

To effectively address the tax-related debt-equity bias in a manner sustainable for the Union’s public finances, an allowance for equity financing should be accompanied by a rule limiting the deductibility of exceeding borrowing costs for groups that are not medium-sized groups and undertakings that are not SMEs . However, given the adverse economic conditions stemming from the COVID-19 crisis and from the Russian war of aggression against Ukraine, that limitation rule should only be introduced as of 2027 . Given the different objectives between such a rule and the existing anti-tax avoidance rule on interest limitation of Article 4 of Directive (EU) 2016/1164, both rules should be maintained. Taxpayers should first calculate the deductibility of exceeding borrowing costs under this Directive and then under ATAD. In the event that the latter results in a lower amount of deductible exceeding borrowing costs, the taxpayer should deduct this lower amount and carry forward or back any difference between the two amounts in accordance with Article 4 of ATAD.

(9)

In order to evaluate the effectiveness of this Directive, the Commission should prepare and publish an evaluation report on the basis of the information provided by Member States and of other available data.

(9)

In order to evaluate the effectiveness of this Directive, as well as its impact on SMEs and on tax revenues in Member States, the Commission should prepare and publish an evaluation report on the basis of the information provided by Member States and of other available data. That report should pay special attention to SMEs, and should in particular assess whether the special conditions made available to SMEs have proven to be sufficient to increase the attractiveness to them of equity financing. In the case of a negative evaluation in that report, the Commission should, without undue delay, submit to the European Parliament and to the Council a legislative proposal addressing that issue. The Commission’s report should be published.

(5a)

‘large undertaking’ means a large undertaking within the meaning of Article 3(4) of Directive 2013/34/EU;

(5b)

‘medium-sized group’ means a medium-sized group within the meaning of Article 3(6) of Directive 2013/34/EU;

(5c)

'large group' means a large group within the meaning of Article 3(7) of Directive 2013/34/EU;

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10 consecutive tax periods, from the taxable base of an SME or medium-sized group for corporate income tax purposes up to 30 % of the taxpayer’s earnings before interest, tax, depreciation and amortisation (‘EBITDA’);

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7 consecutive tax periods, from the taxable base of any large undertaking or large group for corporate income tax purposes up to 30 % of the taxpayer's EBITDA.

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for a maximum of 3 tax periods, where the taxpayer is a large undertaking or a large group;

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without time limitation, where the taxpayer is an SME or a medium-sized group.

(b)

the number of SMEs that have benefitted from the allowance in the tax period, including as a percentage of the total number of SMEs falling within the scope of this Directive and the number of SMEs that have benefitted from the allowance, which are part of large groups within the meaning of Article 3(7) of Directive 2013/34/EU;

(b)

the number of SMEs and medium-sized groups that have benefitted from the allowance in the tax period, including as a percentage of the total number of SMEs and medium-sized groups falling within the scope of this Directive and the number of SMEs that have benefitted from the allowance, which are part of large groups within the meaning of Article 3(7) of Directive 2013/34/EU;

(a)

SMEs, in particular assessing whether the special conditions available to SMEs have proven to be sufficient to increase the attractiveness of equity financing to them;

(b)

the limitation to interest deduction, in particular as regards the impact of amount (a) referred to in Article 6(1) on the fiscal revenues of Member States;

(c)

the link with legislative acts in the field of corporate tax, namely a Directive ensuring a minimum effective tax rate for the global activities of large multinational groups and a Directive on a Framework for Income Taxation in Europe (BEFIT).