The European Commission (EC) proposes to deduct the cost of equity in corporations.
Now an organization may only deduct the costs and interest of debt in the corporate income tax. This does not include the cost of equity, such as the payment of dividends. This means that financing with borrowed money is fiscally attractive. The EC wants to equalize the tax treatment of equity and debt, according to the draft directive which the European Commission wants to introduce for a common corporate tax base across the EU.
The draft directive would show furthermore that the EC intends to limit the use of the participation exemption. Now an organization should keep a stake of at least 5% in the other organization. The EC plans to extend this requirement to own 10%. In addition, the organization must hold 10% of the shares at least a year in succession to benefit from participation exemption.