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Debt-equity bias reduction allowance and limiting the deductibility of interest for corporate income tax purposes

TA-9-2024-0006 · P9_TA(2024)0006 · PE738.463

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Parliament's amended version of a proposed Council directive on a debt-equity bias reduction allowance and on limiting the deductibility of interest for corporate income tax purposes. It lays down an allowance on equity, calculated on the year-on-year increase in net equity multiplied by a risk-free interest rate plus a risk premium, deductible up to 30% of EBITDA. SMEs and medium-sized groups get 10 consecutive tax periods, a 1% risk premium and unlimited carry-forward; large undertakings and large groups get 7 consecutive tax periods and carry-forward limited to 3 tax periods. It limits the deductibility of exceeding borrowing costs for groups that are not medium-sized and undertakings that are not SMEs to 85% of such costs, applying from 1 January 2027. It requires anti-abuse rules, reporting by Member States, a Commission evaluation report by 31 December 2028 and publication of national fiscal cost assessments before transposition.

Key points

  1. An allowance on equity is deductible from the corporate income tax base up to 30% of EBITDA: for 10 consecutive tax periods for an SME or medium-sized group, and for 7 consecutive tax periods for a large undertaking or large group.
  2. Taxpayers may carry forward the part of the allowance on equity exceeding the EBITDA percentages for a maximum of 3 tax periods.
  3. Where the allowance exceeds net taxable income, the excess is 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.
  4. 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 for the relevant currency plus a risk premium of 1% for SMEs.
  5. If the allowance base becomes negative, an amount equal to the negative allowance becomes taxable for 10 consecutive tax periods for SMEs or medium-sized groups, or 7 for other taxpayers, up to the overall increase in net equity.
  6. Member States must ensure that taxpayers other than SMEs or medium-sized groups may deduct exceeding borrowing costs up to 85% of such costs, and only the lower of that amount and the amount under Directive (EU) 2016/1164.
  7. The limitation on deductibility of exceeding borrowing costs applies to costs incurred from 1 January 2027.
  8. Specific anti-tax avoidance rules target schemes to circumvent the conditions for an equity increase, claim an allowance without a group-level equity increase, or overstate an equity increase; Member States must comply with Code of Conduct Group guidance.
  9. Member States must report the number of SMEs and medium-sized groups that benefited from the allowance, including as a percentage of those in scope and those part of large groups.
  10. By 31 December 2028 the Commission must present a report on the implementation and impact of the directive, assessing SMEs, the interest deduction limitation and links with other corporate tax acts, accompanied if appropriate by a legislative proposal.
  11. Member States may defer application for taxpayers benefiting from a national equity allowance on 1 January 2024 for up to five years, and no longer than the national benefit lasts.
  12. Each Member State must publish an assessment of estimated fiscal costs and the resulting decrease in the effective tax rate before transposing the directive, and take measures to protect tax revenues if needed.

Who is affected

  • SMEs and medium-sized groups: get a 10-period allowance, a 1% risk premium, unlimited carry-forward and no interest deduction limitation.
  • Large undertakings and large groups: get a 7-period allowance, carry-forward limited to 3 tax periods and the 85% interest deduction limit.
  • Member States: must transpose the rules, report data, publish fiscal cost assessments and may defer application for existing national beneficiaries.
  • The Commission: must prepare and publish an evaluation report by 31 December 2028, with a legislative proposal if appropriate.

Figures and deadlines

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

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