Thin-Capitalization Rules and Company Responses - Experience from German Legislation

36 Pages Posted: 12 Nov 2008

See all articles by Alfons J. Weichenrieder

Alfons J. Weichenrieder

Goethe University Frankfurt - Department of Applied Econometrics and International Economic Policy; Vienna University of Economics and Business; CESifo (Center for Economic Studies and Ifo Institute)

Helen Windischbauer

Johann Wolfgang Goethe University

Date Written: November 1, 2008

Abstract

By granting intracompany loans to their foreign affiliates, multinational firms may reduce their tax liability abroad. Many countries have legislated thin-capitalization rules (TCRs) that limit the allowable levels of intracompany loans or restrict interest deductibility if certain thresholds are crossed. This paper empirically analyzes the effect of the German TCR on corporate policy. We find that tightening the regulations in 2001 had some limiting effect on leverage. Foreign affiliates reacted by reducing intracompany loans and increasing equity, with no significant evidence of reduced real investment. A possible reason for the limited impact of the TCR was that multinational firms had the option to work around the regulation by using holding company structures. Indeed, holding companies have been used to shift huge amounts of intracompany loans onto the books of German affiliates. At the same time, however, only part of these observed reorganizations seem to have been a reaction to TCR.

Keywords: multinational firm, debt, thin capitalization, financial structure

JEL Classification: H25, G38

Suggested Citation

Weichenrieder, Alfons J. and Windischbauer, Helen, Thin-Capitalization Rules and Company Responses - Experience from German Legislation (November 1, 2008). CESifo Working Paper Series No. 2456, Available at SSRN: https://ssrn.com/abstract=1299533 or http://dx.doi.org/10.2139/ssrn.1299533

Alfons J. Weichenrieder (Contact Author)

Goethe University Frankfurt - Department of Applied Econometrics and International Economic Policy ( email )

United States

HOME PAGE: http://www.uni-frankfurt.de/fb02/weichenrieder/

Vienna University of Economics and Business ( email )

Welthandelsplatz 1
Vienna, Wien 1020
Austria

CESifo (Center for Economic Studies and Ifo Institute) ( email )

Poschinger Str. 5
Munich, DE-81679
Germany

Helen Windischbauer

Johann Wolfgang Goethe University

Grüneburgplatz 1
Frankfurt am Main, 60323
Germany

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
723
Abstract Views
2,722
Rank
65,445
PlumX Metrics