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Austria Is Mulling an Allowance for Corporate Equity

6 min readBy: Elke Asen

Last week, Austria’s Finance Minister Gernot Bluemel stated that Austria is looking at introducing a taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. allowance for corporate equity—or sometimes also referred to as notional interest deduction—as early as next year. Such an allowance would allow businesses to deduct a defined rate of interest on equity from their tax baseThe tax base is the total amount of income, property, assets, consumption, transactions, or other economic activity subject to taxation by a tax authority. A narrow tax base is non-neutral and inefficient. A broad tax base reduces tax administration costs and allows more revenue to be raised at lower rates. —a measure that intends to strengthen businesses’ equity ratios. Low equity ratios are considered a real risk to economic stability—something of particular concern during, and most likely well after, the peak of, this current economic crisis.

Why: Allowances for Corporate Equity Address the Debt Bias

Businesses can finance their operations through debt or equity. However, the return on these types of finance is taxed differently. Traditional corporate income taxA corporate income tax (CIT) is levied by federal and state governments on business profits. Many companies are not subject to the CIT because they are taxed as pass-through businesses, with income reportable under the individual income tax. systems allow tax deductionA tax deduction is a provision that reduces taxable income. A standard deduction is a single deduction at a fixed amount. Itemized deductions are popular among higher-income taxpayers who often have significant deductible expenses, such as state and local taxes paid, mortgage interest, and charitable contributions. s of interest payments but not of equity costs, effectively providing a tax advantage of debt over equity finance—the so-called “debt bias.” This tax-induced debt bias encourages businesses to use debt-finance, increasing leverage and thus potentially negatively impacting financial stability.

There are two broad ways to address this debt bias, namely limiting the tax deductibility of interest and providing a deduction for equity costs. Limiting the tax deductibility of interest expenses creates new distortions, as interest income usually continues to be fully taxed. An allowance for corporate equity retains the deduction for interest expenses but adds a similar deduction for the normal return on equity, neutralizing the debt bias while eliminating tax distortions to investment.

The IMF estimates that the debt bias in corporate tax systems increases debt ratios by on average 7 percent of total assets, including for financial institutions. The same IMF study also shows that the implementation of allowances for corporate equity has proven effective in lessening the debt bias. For example, in Belgium the allowance for corporate equity resulted in an increase of the equity ratio of around 10 percentage points.

How: Design of an Allowance for Corporate Equity

An allowance for corporate equity can be designed in various ways, with the rate and base being the two main features. The allowance rate might be based on a country’s average corporate or government bond rate and can be adjusted by a risk premium.

The allowance base is a company’s equity. It can either include all equity (the total stock) or be limited to the increment relative to some base year (new equity). A central concern surrounding the implementation of an allowance for corporate equity is its tax revenue costs. Limiting the base to new equity significantly lowers the revenue costs while largely preserving the efficiency gains.

Tried and Tested: Countries with Existing Allowances for Corporate Equity

Austria would follow a relatively recent trend of governments implementing allowances for corporate equity. Belgium and Brazil were two of the first countries to implement an allowance for corporate equity, followed by other countries such as Cyprus, Italy, Malta, Poland, Portugal, and Turkey. While the applied allowance rates vary significantly across countries, most countries have opted for the incremental regime that uses new equity as its base.

Countries with Allowances for Corporate Equity
Country Period Details Allowance Rate (2019) Allowance Base (2019)


Since 2006

The allowance for corporate equity allows all companies subject to Belgian corporate income tax to deduct a fictitious interest calculated on the basis of their shareholder’s equity (net assets) from their taxable income. In 2013, legislative changes ruled out the carrying-forward of unused allowances. Small firms receive an additional 0.5% risk premium on their notional rate. This was initially capped at 6.5% and is now limited to 3%. Since 2018, the deduction no longer applies to the full equity stock. It includes anti-avoidance provisions to prevent the cascading of the tax benefit. The rate is based on the return on a Belgian 10-year state bond.

0.726% (0.5 pp higher for SMEs, i.e., 1.226%)

New equity


Since 1996

Brazilian companies are allowed to pay a “deductible dividend,” which is called interest on net equity (INE), to their shareholders, although a 15 percent withholding tax applies.

Long-term government bond rate

Net Equity


Since 2015

Applicable new equity is calculated over 2015 as a base year. The notional interest deduction is limited to 80% of EBIT and applies only to fully-owned subsidiaries if their assets are used for business (non-financial) purposes. The notional interest rate is the 10-year government bond rate of the country where funds are invested, plus a 3% risk premium. The minimum government bond rate is the 10-year Cypriot government bond rate.


New equity


Since 2011*

The allowance for corporate equity allows all companies subject to Italian corporate income tax to deduct a fictitious interest calculated on the basis of their shareholder’s equity (net assets) from their taxable income. The deduction does not apply for the purpose of the Italian local tax IRAP.


New equity


Since 2018

Allowance for corporate equity limited to 90% of chargeable income, which can be carried forward indefinitely. The notional interest rate is set to the rate of 20-year Maltese government bonds, plus a risk premium of 5%.


Full equity stock


Since 2019

The notional return is deductible up to around EUR 60,000 (USD $67,000). The notional interest rate is the National Bank of Poland’s reference rate (as applicable on the last day of the preceding calendar year), plus 1 pp.


Full equity stock


Since 2017

The notional return is deductible up to EUR 2 million and capped at 25% of a firm’s EBITDA. It applies to capital increases for 5 years, provided capital is not reduced in that period. Prior to 2017, Portugal’s allowance for corporate equity was limited to small- and medium-sized enterprises (SMEs).


New equity


Since 2015

The allowance for corporate equity allows all companies subject to Turkish corporate income tax to deduct a fictitious interest calculated on the basis of their shareholder’s equity (net assets) from their taxable income. 50% of the notional interest amount calculated over the cash increases of the paid-in capital of corporations is deductible from the corporate base. The rate is based on the annual weighted average interest rate applied to Turkish-denominated loans provided by banks.

(in 2018)

New equity

Note: *Italy’s NID was abolished in 2019 but reintroduced in 2020 applying retroactively to 2019, leaving no gap. See PwC, “Italy adopts digital services tax and reintroduces notional interest deduction,” Jan. 9, 2020,

Source: Christoph Spengel, Frank Schmidt, Jost Heckemeyer, and Katharina Nicolay, “Effective Tax Levels Using the Devereux/Griffith Methodology,” European Commission, November 2019,; and European Commission, “Tax policies in the European Union: 2020 Survey,” Feb. 3, 2020,

Though it has not been adopted, it is worth noting that the European Commission’s proposal for a Common Corporate Tax Base (CCTB) in the EU includes an “Allowance for Growth and Investment,” which is essentially an incremental allowance for corporate equity. The allowance rate would be based on a 10-year government bond yield plus a 2 percent risk premium. A 2 percent floor would apply if the applicable bond yield is negative. An impact assessment of the CCTB proposal for the EU highlights the positive impact similar policies would have on investment.


If Austria were to adopt an allowance for corporate equity, it would reduce tax distortions to equity-debt ratios, likely improving equity ratios. In addition, such an allowance would significantly lower the cost for equity-financed projects and thus encourage this type of investment. While this is not a short-term measure to alleviate the economic losses resulting from the current crisis, experience from other countries has shown that it can be a sensible long-term policy that can strengthen Austria’s investment environment and improve financial stability.

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