EU offers tax incentives for equity financing like those for debt

BRUSSELS, May 11 (Reuters) – The European Commission proposed on Wednesday that companies get tax incentives to raise funds through share issues in the same way they do when they borrow, which would remove the tax bias favoring corporate debt and make businesses more stable.

European companies get 70-80% of their funding from bank loans and the rest from securities, making them vulnerable when banks are less willing to lend or in the event of a banking crisis.

“By making new equity tax-deductible, just as debt currently is, this proposal reduces the incentive to increase (corporate) borrowing and allows them to make financing decisions based solely on commercial considerations. “, said Commission Vice-President Valdis Dombrovskis.

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Total corporate debt in the European Union was €14.9 trillion in 2020, or 111% of EU gross domestic product.

In the United States, the proportions of corporate finance are reversed, and the EU is working towards this as part of its Capital Markets Union project to increase non-bank corporate finance.

“Our proposal will help businesses build stronger capital, making them less vulnerable and more likely to invest and take risks,” said EU Economics Commissioner Paolo Gentiloni.

The Commission expects the combined approach of equity deduction and limited debt interest deduction to boost investment by 0.26% of GDP and GDP itself by 0.018%.

According to the Commission’s proposal, the tax deduction would be made on the difference between the net equity at the end of the tax year and the net equity at the end of the previous tax year, multiplied by a notional interest rate.

The equity allowance would be deductible for 10 consecutive tax years, as long as it does not exceed 30% of the company’s taxable income.

The proposal will now need to be approved by EU governments and the European Parliament before becoming law.

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Reporting by Jan Strupczewski Editing by Tomasz Janowski

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Carol M. Barragan