DEBRA – Debt-Equity Bias Reduction Allowance

insight featured image
The European Commission recently published a proposal for a new EU Directive creating a debt-equity bias reduction allowance (‘DEBRA’) and further limitation of the deductibility of interest for corporate tax purposes. This initiative is part of the “EU strategy on business taxation”. It is also one of the actions the Commission has suggested to help businesses impacted by the Covid pandemic.

In an Irish context, a tax deduction is generally available for interest costs associated with debt financing however, no tax deduction is currently available for costs associated with equity finance such as dividends.

The proposed Directive seeks to address this bias by providing, under certain conditions, for a tax deduction for notional interest on increases in equity and to limit the tax deductibility of exceeding borrowing costs.


The proposed Directive will build on the EU’s Capital Markets Union Action Plan (CMU) which aims to increase equity investment and to help companies raise the capital they need and improve their equity position, especially during periods of higher deficits and debt levels. The Commission’s stated intention behind the Directive is to avoid an over-reliance on debt funding and encourage increased equity funding of businesses.

The improvement in equity investment levels is viewed by the Commission as a way of supporting growth, innovation and the competitiveness of the EU economy as well improving resilience to unforeseen changes in the business environment.


All taxpayers that are subject to corporate income tax in one or more Member States, including permanent establishments in one or more Member States of entities resident for tax purposes in a third country. Certain financial undertakings (as defined) will be exempt.

Allowance on equity

The central measure in the proposal is a deductible allowance for increases in equity from taxable income for corporate income tax purposes.  The allowance will be deductible for 10 consecutive tax years, so long as it does not exceed 30% of the taxable income before interest, tax, depreciation, and amortisation (“EBITDA”).

The deductible allowance will be calculated by the Allowance Base (‘as defined’) multiplied by the notional interest rate (‘NIR’) as per the equation: Allowance on equity = Allowance Base X Notional interest rate (NIR).

The applicable notional interest rate depends on the 10-year risk-free interest rate for the relevant currency as will be determined by reference to the 2009 Solvency II Directive (Directive 2009/138/EC11) and is increased by a risk premium of 1%.

A higher risk premium of 1.5% will apply in case of Small and Medium Enterprises (SMEs) in recognition of the increased difficulty in accessing equity markets compared to larger companies.

Calculating the allowance base

The Allowance Base on equity is calculated as the difference between the level of net equity at the end of the current tax year and the level of net equity at the end of the previous tax year (i.e. the year on year increase in equity). The proposal defines equity and net equity as follows:

  • Equity: the sum of the taxpayer’s paid-up capital, share premium accounts, revaluation reserve and other reserves and profit or loss carried forward.
  • Net equity: the difference between the equity of a taxpayer and the sum of the tax value of the taxpayer’s participation in the capital of associated enterprises and the taxpayer’s own shares.

If there is a decrease in equity of a taxpayer that previously benefitted from an allowance on equity increase, an amount calculated the same way as the allowance would become taxable for 10 consecutive tax years. However, this rule shall not apply if the taxpayer provides evidence that this decrease is exclusively due to losses incurred during the tax year or due to a legal obligation to reduce capital.

Limitations on the deductible allowance

The deductibility of the allowance is limited to a maximum of 30% of the taxpayer’s EBITDA (earnings before interest, tax, depreciation and amortisation) for each tax year. The amount of deductible allowance on equity that exceeds the taxpayer’s net income in a tax period may be carried forward without limitation in time.

Additionally, any unused allowance capacity (i.e. where the allowance does not reach the aforementioned maximum amount of 30% of the EBITDA of the taxpayer) can be carried forward for a maximum period of five tax years.

Further limitation on interest deduction

On the debt side, it is proposed that the deductibility of debt interest will be restricted by 15%. i.e. to 85%. 

Significant interest limitation rules (‘ILR’) were introduced under the Anti-Tax Avoidance Directive (ATAD) I which became effective in Ireland from 1 January 2022. The proposed Directive provides that the taxpayer will apply the above restriction as a first step and then, calculate the limitation applicable in accordance with the ILR rules.

Anti-abuse rules

To ensure abuse of the allowance on equity does not occur, the proposal provides for certain anti-abuse rules which focus on schemes put in place to circumvent the conditions on which an equity increase may qualify for an allowance. The rules broadly capture certain transactions between associated companies, equity contributions from non-EU shareholders and certain restructuring transactions which would result in equity increases which are not genuine increases in equity.

Actions and next steps

The proposal will require unanimity from all 27 EU Member States for the Directive to progress.  Once adopted as a Directive, it should be transposed into Member States’ national law by 31 December 2023 and come into effect as of 1 January 2024. These dates may be subject to change.

Certain Member States that have rules in place providing for an allowance on equity increases may defer the application of the provisions of this Directive for a period of up to 10 years. Ireland does not have such rules in place and therefore cannot avail of this deferral period.

While the proposed allowance for equity is to be welcomed, the accompanying limitation for interest deductions may further restrict the use of debt financing. The interest limitation provision under the Directive layered onto existing ILR provisions also adds further complexity and administrative burden for taxpayers.

We would strongly encourage companies to consider their existing and medium term financing structures and assess the potential benefits and impact on debt versus equity financing.

At Grant Thornton, we have a team of specialist experts in this area that can partner with you to review your finance structures, provide insight into the latest guidance and how it may impact your business and offer sensible guidance to be ready if the proposed Directive is passed and implemented.