On 11 May this year, the European Commission published a proposal for a Directive to combat tax asymmetries between the various Member States, providing a tax deduction mechanism for amounts corresponding to increases in equity capital in a fiscal year, under similar conditions to those provided for debt.
Therefore, to stimulate the financing of companies through equity – thus contributing to the capitalisation of financially vulnerable companies -, a range of practical measures for this type of operation is now presented, especially considering that some tax systems of the Member States of the European Union already offer incentives in this field.
For example, this is the case with Portugal, which has enshrined in Article 41-A of the Statute of Tax Benefits the possibility for companies to deduct an amount corresponding to the conventional remuneration of share capital.
Taxpayers subject to corporation tax in one or more Member States of the European Union, excluding financial entities, will be able to apply a notional interest rate to the variation in their net assets between the current tax year and the previous tax year to this difference, the value of which may ultimately be deducted for tax purposes in the following ten tax years up to 30% of the EBITDA.
In this regard, the proposal also contains several anti-abuse exclusion measures. Thus, and as an example, equity increases originating from (i) intra-group loans, (ii) intra-group transfers of existing shareholdings or business activities and (iii) under certain conditions, cash contributions, will be excluded from the calculation of the increase in net equity.
Diametrically, a 15% limit to the deductibility of interest on debt financing is created as a disincentive to financing practices considered surplus.
Strictly speaking, it should be noted that this reflects the provisions already adopted by the European Union concerning the ATAD, in which the legislative harmonisation is expressed in the proposal, with the application of the DEBRA rule in the first instance, followed by the limit applicable by the ATAD.
The objectives expected from the introduction of the measures are essentially reflected in the possibility of increasing investment, employment and business growth, with a particular impact on SMEs, which will benefit from the possibility of deducting a notional interest rate over 1.5% depending on the risk, which is believed to facilitate their economic recovery and increase their resilience.
Finally, the Directive plays an essential role in standardising EU rules, mitigating market distortions within the EU itself and the risks of ‘treaty shopping’, creating a more cohesive tax environment from January 2024.