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European Association of Corporate Treasurers

EACT

The European Association of Corporate Treasurers (EACT) is a not-for-profit organisation bringing together as its members national treasury and finance professional associations (NTAs) in Europe.

Lobbying Activity

Response to Debt equity bias reduction allowance (DEBRA)

27 Jul 2022

The European Association of Corporate Treasurers (EACT) welcomes the European Commission's proposal for a Debt-Equity Bias Reduction Allowance (DEBRA), notably the implementation of a harmonised notional interest deduction regime for EU companies. Nevertheless, EACT anticipates that, for the reasons discussed below, the proposed directive may not result in increased equity funding as opposed to debt funding by EU companies. Rather, it risks increasing funding costs. In this context, EACT believes that the debt-equity bias should be addressed by making equity more attractive, as opposed to making other financing options more expensive. First, EACT notes that the scope of the proposal is very broad, as it applies indifferently to most EU companies. Yet their profiles are very different, with large companies primarily relying on financial markets to finance their activities. On the other hand, for small, medium and family-owned businesses (SMEs) debt is often the only reasonable option to finance growth. As a result, EACT expects that the two measures provided by the Directive risk being unevenly applied across EU companies, depending on their profiles. In addition, for many large companies, the proposed directive would likely result in an increased cost of debt. Indeed, the deductibility of interest would be limited to 85% for all taxpayers while the notional interest measure would generally not be applicable given the limitation related to “the tax value of its participation in the capital of associated enterprises and the value of its own shares”, as well as the necessity to distribute dividends, which is a market requirement for shareholders and investors. Similarly, the proposed directive risks resulting in increased financing costs also for SMEs. Indeed, given their size, SMEs face serious challenges in accessing financial markets or private equity funding, while remaining heavily reliant on debt funding. Also, the implementation of some of the proposed rules, notably the determination of excess interest and the notional interest, would be particularly burdensome for SMEs whose resources are limited. While EACT recognises that the notional interest rate insufficiently encourages EU companies to finance their development through equity instead of debt, this measure could be improved by applying a similar debt-equity tax treatment, notably considering: • The application of a more attractive notional interest rate, for instance by incrementing the 10-year interest by a fair-market equity risk premium significantly higher than 1 or 1.5%. • Allowing the deduction of notional interest during the full allowance period, except in the case of tax avoidance, with a view to providing certainty to EU companies. Second, EACT warns about possible counterproductive collateral effects, which assume greater importance given the current economic stress. Indeed, in a globalised capital market, limitations to the interest deduction risk is likely to prove detrimental to the growth of EU businesses by hampering their capacity to generate net income and accumulate retained earnings. Also, EACT considers that the lower profitability that could result from the directive would negatively impact the EU’s international economic attractiveness. As a result, investors currently operating in the EU could be encouraged to relocate part of their funding activities in non-EU countries. Overall, EACT argues that in its current design the proposed directive risks having a detrimental impact on the competitiveness of EU businesses, while not being sufficiently effective in encouraging EU businesses to opt for equity instead of debt financing. If the European Commission still considers that the gap between debt and equity tax treatment must be narrowed, EACT would recommend the implementation of a truly equivalent regime between debt interest and notional interest.
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Response to Alignment EU rules on capital requirements to international standards (prudential requirements and market discipline)

22 Feb 2022

The European Association of Corporate Treasurers (“EACT”) – which brings together 24 national associations, representing over 6.500 companies across Europe – welcomes the objectives of the review of the banking framework which should contribute to ensuring financial stability and economic growth. While these rules directly impact the capital that banks must hold against certain assets, they may also indirectly impact banks’ capacity to meet corporates’ funding needs. We would thus like to highlight a few elements of the package that are of particular relevance to corporate treasurers. We welcome the fact that the Commission proposal maintains the exemptions from the Capital Valuation Adjustment (CVA) risk charge for transactions with non-financial counterparties below the EMIR clearing threshold. These exemptions are instrumental in allowing EU non-financial companies to use OTC derivatives to hedge risks such as movement in currencies or interest rates. We also welcome the Commission suggestion to allow EU banks to have a more lenient capital treatment for their exposures to unrated corporates, however only until 2033. It should be ensured that post 2033, the new rules do not lead to a restriction in banks’ lending operations to unrated corporates. On the other hand, the proposed rules would require banks to set aside more capital against trade finance instruments such as performance bonds, credit lines and guarantees. The change from 20 % to 50 % of Credit Conversion Factors (CCF) are a concern as they would lead to important increase in the cost charged to corporates for widely used trade finance products such as technical guarantees. For EU corporates, access to such products can be essential including when bidding for commercial contracts, especially in large infrastructure or energy projects, where technical guarantees are needed. The impact of the proposed changes on the use, access and cost of certain types of trade finance instruments used by a wide array of industries should thus be duly considered by the co-legislators. The EACT remains completely available to provide further information on these points.
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Meeting with Marlene Madsen (Cabinet of Vice-President Jyrki Katainen)

25 Jan 2017 · EMIR Review

Meeting with Paulina Dejmek Hack (Cabinet of President Jean-Claude Juncker)

25 Jan 2017 · financial services agenda

Meeting with Lee Foulger (Cabinet of Vice-President Valdis Dombrovskis)

19 Oct 2016 · Different aspects impacting on financial companies, CRD review, Basel IV

Meeting with Lee Foulger (Cabinet of Vice-President Valdis Dombrovskis)

15 Oct 2015 · European Market Infrastructure Regulation

Meeting with Mette Toftdal Grolleman (Cabinet of Commissioner Jonathan Hill)

24 Jun 2015 · CVA risk capital charge, European Banking Authority

Meeting with Lee Foulger (Cabinet of Vice-President Valdis Dombrovskis)

29 Apr 2015 · Capital Markets Union

Meeting with Valérie Herzberg (Cabinet of Vice-President Jyrki Katainen)

28 Apr 2015 · CMU

Meeting with Jan Ceyssens (Cabinet of Vice-President Valdis Dombrovskis)

28 Apr 2015 · Financial regulation and real economy