The plan for a DEBRA proposal was initially announced in the Communication on Business Taxation for the 21st Century published by the Commission on 18 May 2021 and seeks to reduce the difference in tax treatment of equity and debt financing. The DEBRA proposal also contributes to the EU's Capital Markets Union Action Plan aiming at helping companies raise capital, particularly in the postpandemic period.

Allowance on equity


The deductible expenses related to equity financing (incremental allowance on equity) would be computed as follows:

  1. The first step would be to annually calculate the difference between net equity at the end of the current tax year and net equity at the end of the previous tax year. Net equity is the difference between the equity (as defined in the Accounting Directive) of a taxpayer and the sum of the tax value of its participation in the capital of associated enterprises and of its own shares.
  2. The second step would be to apply the notional interest rate to the difference in net equity. The notional interest rate would be the 10-year risk-free interest rate for the relevant currency and increased by a risk premium of 1% (1.5% in case of SMEs).


The incremental allowance on equity would be deductible for CIT purposes up to 30% of the taxpayer's EBITDA for 10 consecutive tax years. This limitation mirrors the deduction limitation applicable to exceeding borrowing costs under the EU Anti-Tax Avoidance Directive’s interest deduction limitation rules. Any excess of available allowance on equity could be carried forward by the taxpayer without a time limitation. Additionally, any unavailable allowance due to the 30% EBITDA limitation could be carried forward for a maximum of five tax years.

Limitation of interest deduction


In addition, the DEBRA proposal includes a new interest deduction limitation. It is proposed that 15% of the exceeding borrowing costs, in short interest expenses minus interest income, be non-deductible for CIT purposes. The proposal provides for rules of interaction between this contemplated new limitation and the EU Anti-Tax Avoidance Directive’s interest deduction limitation rules, as well as for carry forward rules of unused amounts.

Anti-abuse measures


The proposal contains various anti-abuse measures. Increases in equity that originate from (i) intra-group loans, (ii) intra-group transfers of participations or existing business activities and (iii) under certain conditions cash contributions would be excluded from the calculation of the increase in net equity. Similarly certain contributions in kind as well as equity increases following a re-characterization of old capital into new capital through, e.g., liquidation transactions would be excluded from the increase in net equity.


The DEBRA proposal, once adopted by the Council, would have to be implemented into Member States’ national law by 31 December 2023 and should come into effect as of 1 January 2024.