Consultation on a Debt Equity Bias Reduction Allowance
1. General remarks Today, many corporate tax systems favour debt financing over equity resulting in a corporate tax bias towards debt financing. To put it bluntly, the debt equity bias penalizes equity finance as it is one of the roots for businesses to favour debt financing over equity. Given this diverging tax burden resulting from different financing sources, we share the European Commission’s assessment which inter alia has been laid down in the Capital Markets Union Action Plan1 that funding for businesses through bonds and private equity is playing an increasingly important role and acts as a complement to bank financing. In our opinion ending the favourable treatment of debt and promoting equity financing would provide a welcomed complement to traditional bank financing arrangements as the corporate sector needs more equity investment. Access to financing is vital for any business at any time. This is especially true for the post Covid-19 recovery period as, inter alia according to the European Systemic Risk Board (ESRB), many businesses are confronted with higher levels of debt.2 In this context, capital markets can play a crucial role in supplying more equity. Making the costs of an investment which is funded through equity financing tax deductible would provide support for businesses not only during economic downturns, but foster investment and long-term growth. This is even more important as European businesses, in contrast to the United States, are still mainly financed by conventional bank loans making European companies potentially more affected by economic crises. The Debt Equity Bias Reduction Allowance (DEBRA) initiative could therefore also help to mitigate the imbalance between Europe and the United States. BDI therefore strongly welcomes the European Commission’s aim to support the post-Covid-19 recovery and increase equity financing of the private sector via tackling and mitigating the potential tax induced debt-equity bias. However, the effectiveness of the measure strongly depends on its final design. German industry would especially welcome the creation of an allowance for equity-financed investments by offering a tax deductibility for 1
European Commission, Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions, A Capital Markets Union for people and business-new action plan, Brussels, 24.9.2020, COM(2020) 590 final, 7. 2 European Systemic Risk Board, Prevention and management of a large number of corporate insolvencies, April 2021. The study inter alia concludes that “the worst-hit sectors have seen substantial deterioration in their financial position since the pandemic. Profits have significantly deteriorated, own equity has decreased, and debt levels have risen in the most heavily impacted sectors (…).”
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