DEBRA: A major change in the approach to the tax deductibility of debt and equity financing

Abstract

The paper explores the recent proposal by the European Commission to reduce the tax bias between the debt and equity financing. The cost of debt financing (eg. interest) is generally deductible from the tax base whereas the cost of capital is not relevant for the tax purposes.

There is no such a thing as free capital, though. The European Commission proposes to allow a deduction for notional interest on equity (a so-called Debt Equity Bias Reduction Allowance).

At the same time, debt financing should be subject to further limitations. The paper examines consequences of this major change on financing of businesses in the context of the Czech tax law.

Keywords

• DEBRA
• Debt Equity Bias Reduction Allowance
• income tax
• tax deduction
• tax bias
• debt financing
• equity financing
• notional interest on equity