EU proposes tax incentives for equity financing like those for debt

EU proposes tax incentives for equity financing like those for debt

On Wednesday, the European Commission proposed that corporations receive tax benefits for raising money through share issues in the same way that they do when they borrow, removing the tax bias that favors corporate debt and making firms more stable.

Bank loans provide for 70-80% of European enterprises’ funding, with the remainder coming from securities, rendering them vulnerable when banks are less willing to lend or during a banking crisis.

“By making new equity tax-deductible in the same way that debt is already, this proposal eliminates the temptation for (businesses) to increase their borrowing and allows them to make financing decisions based solely on commercial considerations,” said Commission Vice President Valdis Dombrovskis.

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In 2020, corporate debt in the European Union totaled 14.9 trillion euros, accounting for 111 percent of EU GDP.

The corporate finance proportions are flipped in the United States, and the EU is working to achieve this through its capital markets union project, which aims to enhance non-bank financing for businesses.

“Our proposal will assist businesses in accumulating more solid capital, reducing their vulnerability, and increasing their willingness to invest and take risks,” said EU Economic Commissioner Paolo Gentiloni.

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The Commission estimates that combining the equity allowance with a restricted interest deduction on the debt will increase investment by 0.26 percent of GDP and GDP by 0.018 percent.

The tax deduction would be based on the difference between net equity at the end of the tax year and net equity at the end of the preceding tax year, multiplied by a notional interest rate, according to the Commission plan.

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For ten consecutive tax years, the allowance on equity would be deductible, as long as it did not exceed 30% of the company’s taxable revenue.

Before becoming law, the plan must be agreed upon by EU countries and the European Parliament.

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