Debt-Equity Bias Reduction Allowance

Key points

The EESC:

• deems that the Commission decision to favour equity over debt not only by granting an allowance on the equity capital increased by companies over time, but also by reducing the deductibility of debt weighing on companies by 15%, might harm European businesses, especially SMEs;
• is concerned that the Commission proposal could make SMEs and micro-businesses, the backbone of the European economy, financially weaker. Such companies do not have easy access to capital markets and, therefore, limiting the deductibility of their interest costs could hamper investment, growth and job creation across Europe;
• maintains that, in the case of small and micro-enterprises, the encouragement towards equity should be pursued mainly, if not only, by tax allowances on equity without penalising the deductibility of interest on debt;
• considers the risk premium of 1 to 1.5% contained in the Commission proposal to be both disconnected from the market reality and insufficient to compensate for the loss of interest costs’ deductibility. In 2021, the Market Risk Premium (MRP) was above 5 per cent in all Member States and currently remains at those levels;
• fears that not allowing deduction for legitimate costs of doing business in the form of interest charges might put European companies at a competitive disadvantage compared to businesses in other major trading blocs;
• notes that disallowing deducibility of interest charges for European companies would create incentives to use leasing arrangements rather than having companies directly investing in machinery and equipment;
• suggests that the Commission substantially reconsider its proposal, including a total or partial exemption from the limitations to debt interest deductibility especially in favour of SMEs and micro-enterprises.