The proposal for the DEBRA directive:

from 2024, the nominal interest on the increase in equity will also be tax-deductible

In our earlier newsletter, we wrote about the EU's comprehensive tax reform plan (https://vgd.hu/en/news/professional-publications-newsletters/befit-the-european-unions-comprehensive-tax-reform-plan-beyond-the-oecd-global-tax-reform ), Action Point 4 of which was the proposal for a directive to tackle the debt-equity bias in corporate tax (Debt Equity Bias Reduction Allowance - DEBRA). On 11 May 2022, the European Commission published a proposal for DEBRA Directive. This newsletter summarises its main points.

The proposal would introduce an allowance that would give equity the same tax treatment as debt. Interest on debt is a tax-deductible expense (the ATAD Directive introduced an interest limitation rule, but apart from this, interest expense reduces the corporate income tax base in all Member States). However, currently, only 6 Member States (Belgium, Cyprus, Italy, Malta, Poland and Portugal) address the debt-equity bias from a tax perspective, albeit in significantly different ways. With the adoption of the DEBRA Directive, this problem would be resolved and standardised even before introducing a single corporate tax rulebook for the EU: companies would be entitled, under certain conditions, to the deductibility for tax purposes of notional interest on increases in equity from one tax year to the next. At the same time, the deductibility of exceeding borrowing costs above a certain level would be restricted.

The allowance will be available to companies for the tax year and the following 9 years. For companies that have benefited from this allowance, but their equity decreased in subsequent years, the Directive provides for a proportionate increase in the tax base.

The restriction on the deductibility of exceeding borrowing costs and the interest limitation rule introduced by the ATAD Directive (and implemented in Hungary, too) would apply in parallel, as they have different objectives. According to the DEBRA proposal, the deductibility of interest would be limited to 85% of exceeding borrowing costs (i.e. interest paid minus interest received). Should the result of applying the ATAD rule be a lower deductible amount, the taxpayer will be entitled to carry forward or back the difference.

According to the proposal, the DEBRA Directive would enter into force on 1 January 2024, with Member States (including Hungary) having to transpose its provisions into national law by 31 December 2023 at the latest.

We will inform our clients about the adoption of the proposal in future newsletters.

2 June, 2022.

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Should you have any questions regarding this newsletter, the tax experts of VGD Hungary will be pleased to assist you.

This newsletter provides general information and does not constitute tax advice.