The European Commission (EC) issued today a proposal for a Council Directive to address the debt-equity bias, as part of the EU strategy on business taxation. The rules would introduce tax deductibility of notional interest on increases in equity, while providing for a limitation on net interest expense.
The effective date would be as of 1/1/2024, with Member States’ conforming their laws by 31 December 2023. The equity deduction is based upon a 30% limitation of EBITDA, with carryover provisions.
The proposal is a very interesting read, evidencing the intent to arrive at a practical and efficient methodology to place equity on a more level playing field as interest, from a tax deductibility aspect. Additionally, this intent would also minimize the placement of intercompany loans in entities which do not have a foreseeable ability to repay interest.
Although this is an EU proposal, other countries will be following these developments closely.