Debt equity bias reduction allowance — public consultation

7 October 2021


The objective of the initiative is to introduce an allowance system for equity financing in order to mitigate the debt-equity bias induced by taxation, thereby reducing overall debt-leverage of companies and supporting the economic recovery from the COVID-19 crisis. The Commission services will explore different ways in which such an allowance could be designed and implemented as well as possible alternative options to achieve the same objectives. It will also explore how anti-tax avoidance rules linked to such allowance can be designed to ensure tax fairness and prevent the use of the allowance for unintended purposes.

The questionnaire should take about 30 minutes to complete. The questionnaire is accessible in English in the first instance, but will be made available in all official EU languages within two weeks. You can submit your reply in any of the official EU languages.

In addition to the introduction, the consultation is structured as follows:

The second part presents some general background information on the initiative.

The third part of the questionnaire asks for some background information about you, the respondent.

The fourth part covers the causes and consequences related to the tax based debt-equity bias.

The fifth part covers possible solutions to address those shortcomings.

The final section allows you to upload a position paper or any kind of document that you think is relevant to better explain your views.


In the Communication Business Taxation for the 21st Century1, the Commission announced a proposal to address the debt-equity bias in corporate taxation. The initiative would support the action plan for the Capital Market Union, which acknowledges that the corporate sector will enter the post-COVID recovery period with higher need for equity investment.2

Most current tax systems across the EU accept interest payments on debt as a deductible expense, reducing the tax base for the purpose of corporate income taxation. At the same time, the costs related to equity financing are mostly not tax deductible. This asymmetric tax treatment of the costs induces a bias in investment decisions towards debt financing. This debt bias of taxation is a long-standing issue.

The tax induced debt-equity bias can contribute to an excessive accumulation of debt for non-financial corporations. Excessive debt levels make companies vulnerable to unforeseen changes in the business environment and increase their risk of insolvency. Necessary business restructuring following insolvency procedures often comes with considerable social costs in the form of mass layoffs. A large number of related non-performing loans can negatively affect financial stability. Total indebtedness of non-financial corporations amounted to almost EUR 14 trillion in 2019 or 99.8% of GDP in the EU-27.

Within the single market, excessive insolvencies and financial instability have the potential to spill over to other Member States and affect the EU as a whole. Following the COVID-19 health crisis and in the framework of the transition to a greener and digitalised economy, substantial equity financing is of central importance for a fast and sound recovery. Companies with a solid capital structure are less vulnerable to shocks and more prone to make investments and to take risks. This can positively affect competitiveness, growth and ultimately employment.

Six Member States (Belgium, Cyprus, Italy, Malta, Poland and Portugal) already have legislative measures in place to tackle the tax induced debt-equity bias. The measures differ in policy design but all provide for a tax allowance on equity.

See the full questionnaire