What changed between the draft committee report and the plenary report

The rapporteur welcomes the European Commission’s initiatives in improving the corporate tax systems in the EU, aiming at having fairer and simpler tax systems. This would in turn further strengthen the economy of the EU as well as the Capital Markets Union.

The COVID19 and the current crisis stemming from the Russian invasion emphasises the need for addressing the corporate debt bias, with many companies having to rely on debt financing in order to cover economic losses. As the energy crisis is deepening and interest rates are going up in response to a very high level of inflation, this can put many EU companies, especially SMEs, under a financial strain.

The unequal treatment between debt and equity leads to a tax-led bias toward debt, while this choice can make firms more vulnerable in bad times. It also leads to a bias towards an increase in indebtedness in the EU Single Market and undermines the development of the equity market. Some Member States have already a tax allowance on equity in place at national level, but differences in their design increases compliance costs for businesses active in several Member States. Therefore, the rapporteur welcomes the Commission’s proposal to address the debt equity bias at the EU level.

Despite some reservations on the proposal, the rapporteur believes that there is a strong economic reason to consider this proposal positively. To address some concerns, the option to roll out the rules gradually provides a good response.

The rapporteur introduces minor changes to the Commission’s text, which aim to assist SMEs. Namely, since SME’s are more exposed to longer periods of losses, increased allowance on equity as well as a longer period for tax deductibility should be considered. In addition, the rapporteur proposes higher equity allowance to better reflect the higher costs of capital for SMEs. A gradual introduction of the limitation to interest deduction’s rule as well as permanent full deduction of interests for small loans ensures that the proposal will not have a negative impact for smaller SMEs that cannot effectively use equity financing.

Overall, the proposal does not put an end to debt bias, but at least partly increases the attractiveness of equity financing. As such, it could contribute to better stability of EU firms. The rapporteur is of a view that the proposal should not be rejected by the Council, but rather, be fine-tuned and gradually implemented.