The European Commission will propose a draft law aimed at eliminating tax regimes that favor raising corporate debt over equity, as it tries to reduce the amount of company loans on banks' books and to cut companies' leverage, the Commission announced on 30 September in its Capital Markets Union Action Plan.
In most European countries, companies can defray tax against interest payments on debt but no such deductions are allowed when raising cash through equity markets. According to the EU Commission, the preferential tax treatment of debt from deductibility of interest payments causes equity to be less desirable, impeding efficient capital market financing, which seeks to provide EU businesses with more diverse sources of capital.
In Capital Markets Union Action Plan, the European Commission said it intends to address the tax bias that favors raising corporate debt over equity to encourage more equity investments, create a stronger equity base in companies and improve financial stability, especially in case of banks.
As part of the broader work being taken forward on the Common Consolidated Corporate Tax Base (CCCTB), where a new proposal will be prepared in 2016, the Commission will examine ways to address debt-equity bias.
The decision is consistent with conclusions reached in a paper released September 28, The Tax Reforms Report 2015, which recommended that EU nations take steps to eliminate the debt/equity bias. European Union finance ministers will discuss tax regimes and tax issues at their upcoming meeting in Luxembourg on Oct. 5-6.
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