Equity. The rising star of intercompany funding, or not?

Stevi Frooninckx
Loctax brand

The EU DEBRA initiative has recently been introduced, which may reshape the international tax landscape, or not?

The European Commission has recently published an impact assessment with respect to reducing the tax debt-equity bias, and how providing tax allowances for equity can help in achieving this. At this stage, it remains unclear if, when and under what form and details the new regulations will be released.

Multinationals anyhow better start simulating what consequences increased equity funding could have. A couple of checks are suggested in this blog, and the supporting role of technology and tools is highlighted.


Debt funding has always been high on the agenda of tax policy makers. For many years already, interest deductibility and thin cap regulations exist in most countries. In more recent years, with among others the implementation of BEPS Action 4 and the EU Anti Tax Avoidance Directive I (ATAD I), countries have further tightened their existing rules.

In June 2021, the European Commission published an impact assessment for the so-called Debt Equity Bias Reduction Allowance (‘DEBRA’), an initiative to encourage companies to finance their investments through equity rather than through debt funding. This impact assessment follows the earlier “Business Taxation for the 21st Century” communication of the European Commission, in which an action plan for the Capital Market Union has been included, acknowledging that the ‘corporate sector will enter the post-COVID recovery period with higher debt levels, and needs more equity investment’. Said high debt levels could not only result in tax base erosion (through tax deductible interest), they trigger at the same time higher insolvency risks.

Stimulating equity funding with tax incentives has been around for some time already. Countries like Belgium, Italy and Turkey have, under strict conditions, deemed (or notional) interest deductions in place. In the EU more countries have enacted tax measures to make equity funding more attractive, like Cyprus, Malta, Poland and Portugal. Strangely enough, looking at the recent promotion of the European Commission around equity funding, in countries like Belgium, the upside of said regime has decreased significantly over the years (since its introduction in 2006).

With DEBRA, the European Commission wants to explore whether a common approach can be found among the EU Member States to create a more harmonized tax environment to encourage investments in equity. Indeed, the existing unilateral measures allegedly could create opportunities for corporate tax planning or harmful tax competition among the Member States. Ultimately, given its harmonization goal, DEBRA would line up to the upcoming “Business in Europe: Framework for Income Taxation” (or BEFIT) initiative of the Commission. However, also for BEFIT, the question remains if and when it will get approved.


The Commission will not further kick the can down the road, and expectedly will already come with a legislative DEBRA proposal in Q1 2022, which is an ambitious timing obviously. Therefore, for the sake of proactivity and preparedness, multinationals should start now analyzing their existing funding structures. Below 6 actions are listed that can be considered for doing such an impact analysis.

  • Do an impact assessment on what could be a potential equity contribution impact versus the (existing) debt funding impact;
  • Check what the implications would be if the in-house bank starts doing equity investments (instead of debt funding), among other from a legal, treasury and tax perspective;
  • Check if the in-house bank is properly located in the Legal Org Chart for doing equity funding. If not, can the in-house bank be relocated to a more suitable place (typically higher in the Legal Org Chart), and what are the consequences thereof. One other outcome of such analysis might be that the in-house bank might not be the entity that should be doing the equity contribution;
  • Provided a relocation of the in-house bank is not possible, it should be checked whether there are alternative group entities conveniently located to act as (interim) holding and perform equity investments. At the same time, it should be analyzed how these (interim) holdings would need to be funded;
  • Monitor the substance requirements of the funding entities in the light of the applicable domestic regulations, and the relevant OECD BEPS actions;
  • Finally, it is important to closely monitor the outcome of the OECD BEPS Pillar II developments (for which reference can be made to this earlier blogpost) and any correlation with the DEBRA initiative.


It is clear that having a holistic view on the multinational and its Legal Org Chart is required in order to perform the above checks. Increased levels of equity funding will impact the “AS IS” situation of the Legal Org Chart and such funding will generate significant legal, treasury and tax implications. Equity transactions may require structurings for which it is challenging to immediately oversee all the (tax) implications. It is therefore helpful to have a reliable, digital version of the Legal Org Chart at close reach, together with a single source of truth repository of all the relevant and related documents thereto.

The mapping of the existing funding situation of the different group entities is generally supported with data coming from accounting, consolidation, legal and treasury management tools. Proactive tax managers should start structuring their access to the different data sources, identify and resolve missing or low quality data issues.

More than debt funding, equity investments require a stricter project management approach. Indeed, equity transactions typically involve more (external) stakeholders, and come with a step plan based on a predefined timeline. Project management and general productivity tools will be convenient for nailing the higher amount of equity impacting transactions in the future.

Furthermore, in order to grasp the differences between debt and equity funding, in-house tax teams should have access to up-to-date knowledge databases with global coverage. Often, database searches require quite some effort to cut through the fog. The best knowledge repositories are well-structured, highly topical and with easy search functions, so that country information can be easily compared.

Finally, all transactions should be properly papered up and stored to ensure a smooth and proper future storytelling towards the different stakeholders involved. A track of the review process and approvals would be required as part of the internal compliance framework. In the heat of the moment, there is typically insufficient time to document anything else than the minimum minimorum. It is however of the utmost importance that also the business reasons and the alternative scenarios are documented, ideally in the form of contemporaneous documentation. In-house teams should implement supporting documentation tools to have the highest levels of preparedness for future questions.


There are a lot of open ends about the DEBRA proposal (timing, calculation method, …) and its correlation with existing measures in place (existing interest deductibility restrictions, …), whereby it remains to be seen if and when the new regulations will be implemented. Nevertheless, it is clear that we are entering a new era in international taxation whereby numerous ambitious initiatives are put on the table, reshaping the existing tax landscape, and pursuing the holy grail of more transparency. Multinational companies better now take steps to achieve the highest levels of preparedness.

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