BRUSSELS. (Reuters). The European Commission on Wednesday proposed that corporations receive the same tax incentives when raising money via share issues as when borrowing. This will remove corporate debt’s tax advantage and help firms become more stable.

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, Commission) stated, “By making equity tax-deductible as is debt at present, this proposal decreases the incentive for companies to add to their borrowing and allows them make financing decisions solely based commercial considerations.”

The EU’s total corporate debt was 11,1% of the EU’s gross domestic product in 2020.

American corporate financing ratios are inverted. The EU, under the capital markets union project, is working to reverse this trend.

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.

As long as the equity allowance does not exceed 30%, it would still be deductable for 10 consecutive years.

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