Help companies avoid the risk of bankruptcy

“Businesses should stop financing themselves on debt only and putting their health at risk. There is an urgent need to change the system and to encourage companies to diversify the way they raise money. Therefore, putting debt and equity financing on an equal footing is the right move. There is a strong case for European action, as wildly different Member State solutions will only create opportunities for tax tricks”, explained Markus Ferber MEP, EPP Group Spokesman on Economic Affairs. His statement came as the European Commission is expected to present details today of a planned financial Directive aimed at helping to finance companies, the so-called DEBRA (Debt-equity bias reduction allowance).

DEBRA's goal is to encourage businesses to finance their investments through equity, for example by selling a portion of company shares, rather than debt, by making sure that this kind of financing gets less costly for them.

Many Member States provide the opportunity to deduct interest rate expenses from the tax bill thereby providing an incentive for companies to take on too much debt. “Taking on large quantities of debt is a risky proposition, because businesses that are overleveraged have very little room for error and can easily end up in trouble if something unforeseen happens - such as a pandemic or rapidly rising interest rates. With this DEBRA initiative, we will help companies avoid the risk of bankruptcy”, Ferber said.

“If we do this right, this new initiative will help European companies to become both more competitive and more resilient. It will also be key to account for the special needs of smaller companies, which often have less access to certain types of equity financing”, he concluded.