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REPORT (COM(2022)0216 – C90197/2022 – 2022/0154(CNS))

On the proposal for a Council directive on laying down rules on a debt-equity bias reduction allowance and on limiting the deductibility of interest for corporate income tax purposes

A-9-2023-0387

Committee on Economic and Monetary Affairs · Rapporteur: Luděk Niedermayer

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Written by a language model from the full text only; every figure comes from the text. The paragraph links open the paragraph a statement rests on — check the text itself before relying on it.

Parliament's amended version of a Commission proposal for a Council directive on a debt-equity bias reduction allowance and on limiting interest deductibility for corporate income tax. It approves the proposal as amended. It grants an allowance on equity for 10 consecutive tax periods for SMEs and medium-sized groups and 7 for large undertakings and large groups, capped at 30% of EBITDA. It exempts SMEs and medium-sized groups from the rule limiting the deductibility of exceeding borrowing costs, which applies from 1 January 2027. It asks the Commission to report by 31 December 2028 on the directive's implementation and impact, especially on SMEs and on interest deduction limits.

Committee position. The Committee on Economic and Monetary Affairs approves the Commission proposal as amended, introducing changes to assist SMEs, a gradual introduction of the interest deduction limitation and higher equity allowances for SMEs.

Key points

  1. Parliament approves the Commission proposal as amended and calls on the Commission to alter its proposal accordingly.
  2. An allowance on equity is deductible for 10 consecutive tax periods for an SME or medium-sized group and 7 for a large undertaking or large group, up to 30% of EBITDA.
  3. Taxpayers may carry forward for a maximum of 3 tax periods the part of the allowance on equity exceeding the EBITDA percentages.
  4. Excess allowance on equity may be carried forward for a maximum of 3 tax periods for large undertakings or large groups, and without time limitation for SMEs or medium-sized groups.
  5. The allowance base is the year-on-year increase in net equity; the allowance equals that base multiplied by the 10-year risk-free interest rate plus a 1% risk premium, or 1% for SMEs.
  6. A negative allowance base becomes taxable for 10 consecutive tax periods for SMEs or medium-sized groups or 7 for others, up to the overall increase in net equity.
  7. Member States must ensure transposition measures comply with Code of Conduct Group (business taxation) guidance on notional interest deduction regimes.
  8. A taxpayer other than an SME or medium-sized group may deduct exceeding borrowing costs up to 85% of such costs, or the lower amount under Article 4 of Directive (EU) 2016/1164.
  9. The interest limitation applies to exceeding borrowing costs incurred from 1 January 2027.
  10. Member States report the number of SMEs and medium-sized groups benefiting from the allowance, including as a percentage of those in scope.
  11. By 31 December 2028 the Commission reports on implementation and impact, assessing SMEs, the interest deduction limitation and links with other corporate tax acts.
  12. Member States may defer application for taxpayers benefiting from a national equity allowance on 1 January 2024 for up to five years, and must publish an assessment of estimated fiscal costs before transposing.

Who is affected

  • SMEs and medium-sized groups: exempt from the interest deduction limitation and get a longer allowance period.
  • Large undertakings and large groups: allowance limited to 7 tax periods and interest deduction limited to 85%.
  • Member States: must transpose the directive, publish fiscal cost assessments and report data.
  • The Commission: must report by 31 December 2028 and may propose amendments.

Figures and deadlines

  • 10 consecutive tax periods: allowance on equity for SMEs or medium-sized groups.
  • 7 consecutive tax periods: allowance on equity for large undertakings or large groups.
  • 30% of EBITDA: cap on the deductible allowance on equity.
  • maximum of 3 tax periods: carry-forward of allowance exceeding EBITDA percentages.
  • 1%: risk premium added to the 10-year risk-free interest rate for SMEs.
  • 85%: share of exceeding borrowing costs deductible for non-SMEs.
  • 1 January 2027: date from which the interest limitation applies.
  • 31 December 2028: deadline for the Commission's implementation report.

Legal basis: Article 115 of the Treaty on the Functioning of the European Union.