BRUSSELS (Reuters), – Wednesday’s proposal by the European Commission was that tax incentives be given to companies for raising capital through share offerings in the same manner as when borrowing money. This will remove corporate debt bias and improve stability.

European companies get 70% to 80% of their funding from bank loans, and the remainder from securities. This makes them more vulnerable during times when banks may not be as generous with lending.

Valdis Dombrovskis, Vice President of the Commission, stated that new equity would be tax-deductible just like debt. This proposal will reduce companies’ incentive to borrow more and allow them to finance their businesses solely on commercial factors.

In 2020, 14.9 Trillion Euros was the collective debt of all corporations within the European Union. This is 111% of EU’s gross domestic product.

American corporate financing ratios are inverted. The EU, under the capital markets union project to improve non-bank financing for businesses, is working towards that goal.

Paolo Gentiloni (EU Economic Commissioner) stated, “Our proposal will assist companies to build up solid capital making them less susceptible and more willing to invest and take risk.”

According to the Commission, the combination of equity allowance with limited interest deductions on debt will boost investment by 0.026% and GDP by 0.018%.

The Commission’s proposal would allow for a tax deduction based on net equity at tax year end and net equity at tax year end multiplied with a nominal interest rate.

For 10 years consecutively, the allowance for equity will be deductible as long as 30% or less of the company’s net taxable income.

Before it can become law, the proposal must be approved by all EU countries and the European Parliament.