Example

The need to refine the proposal is further underlined by the fact that the new interest limitation rule under the DEBRA may also accelerate an economic downturn because in times of crises, businesses often have little or no access to equity markets. Together with a changing overall interest rate situation as we see it today, limiting the deductibility of interest would only further harm the economy and businesses. At a time where businesses might struggle with generating new equity financing sources, they would also need to deal with a partial deductibility of interest payments (capped at 85%).

Furthermore, the underlying rationale of the proposal is imbalanced. Not only will all businesses subject to corporate income tax be affected by Article 6 of the draft directive that limits the deductibility of interest payments to 85%, but the NID will also benefit only a limited amount of companies. The advantage for businesses associated with the NID would be even more limited as businesses with a comparatively high equity base will benefit less than others with a low equity ratio. In this context, too, the DEBRA as it stands could contribute to inefficient allocation of capital.

From a more general tax systemic perspective, the provisions of Article 4 and Article 6 cannot plausibly be related to each other as they are based on different reference values. While on the one hand the allowance on new corporate equity refers to a delta value (being a change in equity), the additional interest limitation rule represents a fixed quantity.

Example

We would like to illustrate the effects of introducing an allowance on new corporate equity by referring to the following example3 and has been laid out in the aforementioned BDI response to the public consultation. It is based on the assumptions listed below:

▪ As the equity deduction is granted for equity formed in excess of the level existing on 1 January 2022, no deduction is granted in the first year. ▪ In case the equity either falls below its original level of 100,000 or if the businesses recorded losses in the years in question, no deduction will be applicable in these years and no carryforward of the equity cost deduction from those years will apply. ▪ In the year 2024 there is no equity deduction, as there is no carryforward of the deduction from loss years. ▪ In 2025, no minimum taxation is applied since losses of less than EUR 1 million are generated and carryback is waived.

3 The example is based on Körner, Andreas, Alternativkonzept zur Abgeltungsteuer, Der Betrieb 2015, 403p.