Summary and Background

On 11 May 2022, the European Commission (the “Commission”) published its draft proposal for a debt-equity bias reduction allowance (“DEBRA” or, the “Directive”), which forms part of the Commission’s Communication on Business Taxation reforms which were first outlined on 18 May 2021.  The Directive seeks to remove tax as a weighted factor in the choice of funding for companies and encourage the use of equity investments.  The perceived view of the Commission is that debt is usually favoured over equity due to the fact that most tax systems allow for the deduction of interest on debt, while costs relating to equity financing are usually non-tax deductible.