Consultation on a Debt Equity Bias Reduction Allowance
profits similar to the Estonian or Latvian model. By making corporate income subject to deferred taxation, businesses can use retained profits for additional investments and the creation of jobs. This also reduces incentives for borrowing and lending while at the same time there is no risk of tax losses. Last but not least, corporate income that remains within the company serves as additional liquidity which is of increased importance especially in times of crisis. b. Specific design features The second type of approach which would grant an additional deduction for equity financing could be achieved through an allowance for a notional interest deduction on either all corporate equity, on new corporate equity or on corporate capital (equity and debt). Among these measures, we believe that a preferential treatment of new corporate equity or new profits would be the most practicable solution. However, a clear definition of equity on which the notional interest can be calculated is a necessary prerequisite. We would like to support our opinion with the following example which is intended to illustrate the effects of allowing a deduction on new corporate equity. In the example illustrated in Table 1, which is based on the numerical example in Körner (2015)5, the equity deduction is granted for any equity formed in excess of the level existing on January 1, 2021, i.e. for the amount exceeding 100,000. Table 1 relies on the following assumptions:
5
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No deduction is granted in the first year, as the equity deduction is granted for any equity formed in excess of the level existing on January 1, 2021
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If the equity falls below its original level of 100,000, or if the business recorded losses in the years in question, there is no deduction in these years and no carryforward of the equity cost deduction from those years.
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In 2023 there is no equity deduction, as there is no carryforward of the deduction from loss years.
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In 2024, no minimum taxation is applied, since losses of less than EUR 1 million are generated and since there is no carry back, e.g. because the carryback is waived.
Körner, Andreas, Alternativkonzept zur Abgeltungssteuer, Der Betrieb 2015, 403p.
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