Editorial: Taxing Interest in the Debtor State as an Alternative to DEBRA

Abstract

Basically, a company can be financed by debt or equity. The general national tax systems are that interest, the compensation paid for funds put at disposal by means of a loan, are deductible and that the compensation for funds put at disposal by means of equity is not. In this context, the question often arises of whether this different treatment is justified. Or should they be treated (more) the same? The European Commission has proposed a directive to tackle to debt-equity bias by introducing a notional allowance on equity, on the one hand, and a new limitation on interest deduction, on the other hand (DEBRA). This editorial raises the questions of whether the tax treatment of the remuneration paid on loans (interest) by companies and the remuneration on their equity (profits) as proposed in DEBRA is sufficiently based on principles to contribute to a sustainable tax system with regard to company financing, and if not, what an alternative would be that better complies with those principles. The author concludes that DEBRA is another stopgap for flaws in the current tax systems, which has the potential to further distort the capital markets. He suggests an alternative system based on the principle of origin to remove the debt-equity bias. debt-equity bias, capital markets, tax neutrality, ability-to-pay, direct benefit principle, principle of origin, territorial principle, territoriality principle, taxation of interest, distortion of competition, sustainability