Allowance on new corporate equity (Article 4

competitiveness and the technological disruptions of the last decades – electric cars, autonomous driving, software as service – left no option for this sector but increasing debt financing to enable R&D investment. This structural debt need has been further aggravated by subsequent crises: Covid-19, chip shortage, logistic and other challenges due to the Russian war in Ukraine, increasing gas prices, inflation, etc.

Given that large investments will be needed from the public as well as the private sectors to achieve the green and digital transformation and to keep companies alive, these economic consequences would be even more problematic. In general terms, tax incentives are a useful tool to steer desired behaviour and foster private investment, both of which are key to supporting the competitiveness of European industry. Unlocking investments from the private sector and thereby supporting a strong and innovative industry will help Europe keep pace in the global competition in climate innovation technologies and digitalisation.

Relying only on available equity will however be insufficient for financing private investments in climate and environmental protection measures since this requires massive investments across all sectors and from businesses of all sizes.

Allowance on new corporate equity (Article 4)

According to Article 4 of the draft directive, an allowance on incremental equity (the difference between the level of net equity at the end of the tax period and the level of net equity at the end of the previous tax period) would be granted for a period of ten consecutive tax years.

As BDI has already stated in its feedback to the European Commission’s public consultation in preparation of the draft directive, we believe that a preferential treatment of new profits would indeed be the most feasible solution since it would not come at the expense of substantial tax losses. We would like to underpin our argument with an example which can be found later in this paper.

The limitation to ten years as foreseen in Article 4 of the draft directive is too short as the lifetime for a project is usually longer. Moreover, a ten-year limitation is not present in any similar legislative measure in EU member states providing for a tax allowance on equity. The timing disadvantage becomes clear when equity and debt financing are compared. If investments are financed for several years (e.g. for 15 years) with debt capital, the interest deduction takes place over the entire period of 15 years. In direct comparison to equity capital, the latter would be limited to ten years under the current proposal for a NID. Hence the remaining five years of the investment would be less attractive compared to debt capital.

On top, the current proposal implies that the benefit a company receives through the proposed notional interest deduction (NID) is only temporary, as any later reduction in equity will be penalized with a negative NID over a period of 10 years. This is especially important as it is common business practice to also distribute dividends over the lifetime of an investment and therefore reducing the equity if the capital is not used for investment purposes. Thereby the benefit obtained would be recaptured over the lifetime of the project – making the allowance for businesses only a temporary benefit over an investment’s life cycle. The proposed allowance on new corporate equity should therefore only be introduced without time limitations as such a cap precludes the aim of putting debt and equity financing on an equal footing across the EU.