On 18 May 2021, the European Commission approved a Communication on Corporate Taxation for the 21st century that set out a long-term vision for the European Union (EU) aimed at promoting a robust, efficient and fair tax system in the EU. This Communication recognized the need to create tax deduction mechanisms for the amounts corresponding to the increase in equity in terms similar to those provided for debt.
In view of this context, a Proposal for a Directive was recently published that will introduce changes in the tax systems of EU Member States, namely by creating a tax deduction for the increase in equity, which briefly translates into the following:
• Possibility of deducting a “tax allowance” (referred to in the Allowance on Equity directive) deductible in terms of IRC for 10 consecutive years with a limit of up to 30% of the taxpayer's earnings before interest, taxes, depreciation and amortization ("EBITDA" ).
• The allowance calculation basis is the difference between the net capital level at the end of the fiscal period and the net capital level at the end of the previous fiscal period. This amount is further multiplied by the risk-free interest rate maturing in 10 years plus a fixed rate of 1% (or 1.5% in the case of an SME). The Commission is empowered to change this flat rate.
• If this subsidy is higher than the taxpayer's taxable income for the period, the taxpayer may report the excess in the following periods, with no time limit.
• Taxpayers may report, for a maximum period of 5 years, the part of the tax subsidy that exceeds 30% of EBITDA in a tax period.
• If, after taking a tax deduction, the subsidy base (the difference between the net capital level at the end of the tax period and the net capital level at the end of the tax period) is negative in a given tax period, the amount equal to the base negative will become taxable income for 10 consecutive periods unless the taxpayer provides sufficient evidence that this is due to accounting losses incurred during the period or due to a legal obligation to reduce share capital.
The Commission establishes that Member States may adopt anti-abuse measures to ensure that the subsidy base does not include the amount of increases resulting from loans, transfers of shares and transfers between related companies, and cash inflows from residents of Member States. Members who do not exchange information.
The Commission's proposal also introduces new rules regarding the limitation of interest, whereby the annual deductibility of net financing costs will be limited to the lower value of one of the amounts below:
a) 85% of total net financing expenses for the period; or
b) The higher of EUR 1 000 000 or 30% of EBITDA.
The difference between the value a) and b) may be reported in terms of the ATAD Directive (Anti Tax Avoidance Directive).
This mechanism should apply from 1 January 2024.
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