The European Commission presented a proposal of solutions concerning the possibility of deducting the value of the capital increase from the tax base. It is a solution that is to build a “counterbalance” to the currently abused – according to the European Commission – debt financing.
The genesis of the proposed solutions goes back to the Strategy “Taxation of enterprises in the 21st century” published in May 2021, which presents plans to create a “fair and sustainable business environment” and an EU-wide tax system, as well as specifies measures to promote entrepreneurship while maintaining an effective level of taxation.
The Commission is planning measures to counter the situation where debt is more senior than equity.
One of the proposed measures to counteract this is the DEBRA program (DEBT-EQUITY BIAS IN TAXATION). The proposal assumes that under this relief, it will be possible to deduct the value of the entity’s equity capital increase in a given tax year from the tax base – similarly to debt financing.
The relief will be calculated as the product of the difference between net equity at the end of the current tax year and net equity at the end of the previous tax year and the hypothetical interest rate, i.e. the 10-year risk-free interest rate for a given currency, increased by a risk premium of 1% or, in the case of small and medium-sized enterprises, by 1.5%. Such a structure means that it refers only to the sum of increases in equity in a given year.
The solution would enter into force in 2024.
It is worth recalling that currently in Polish law there is a certain mechanism of tax deduction of the value of the capital increase.
Pursuant to Art. 15cb paragraph. 1 point 2 of the CIT Act in the company, the cost of obtaining revenues is also considered to be the amount corresponding to:
- the product of the reference rate of the National Bank of Poland in force on the last business day of the year preceding the tax year, increased by 1 percentage point, and
- the amount of profit allocated to the company’s reserve capital.
Such cost is due in the year of increasing the reserve or supplementary capital and in the next two immediately following tax years, and the total amount of tax deductible costs deducted in the tax year may not exceed PLN 250,000.
At the same time, pursuant to Art. 15cb paragraph. 5 of the CIT Act, the cost settlement option applies if the subsidy is reimbursed or the profit is distributed and distributed not earlier than after 3 years from the end of the tax year in which the subsidy was contributed to the company or a resolution was adopted to retain the profit in the company.