The EU has published a draft directive designed to help address the perceived bias in favour of debt funding companies as compared with equity and, accordingly, promote financial stability.
The proposals (known as "DEBRA") are due to come into force as of 1 January 2024 and allow a deduction for corporate income tax purposes by reference to net equity. Member states which already operate similar rules can defer the adoption of DEBRA for up to ten years in relation to taxpayers that already benefit from an allowance on equity (but in no case for a period longer than the duration of the benefit under national law).
The directive applies to taxpayers that are within the scope of corporate income tax in a member state (so not UK companies, unless they have an EU permanent establishment). There is an exclusion for "financial undertakings" which we consider below.
The rules take a carrot and stick approach. The carrot is a deduction calculated as a percentage of increases in equity during the tax year whilst the stick is a new rule which will restrict tax deductions for interest costs.