Debt and Equity: What's the Difference? A Comparative View

99 Pages Posted: 17 Sep 2009

See all articles by Wolfgang Schoen

Wolfgang Schoen

Max Planck Institute for Tax Law and Public Finance, Department of Business and Tax Law

Tobias A. Beuchert

Max Planck Institute for Tax Law and Public Finance

Astrid Roesener

Max Planck Institute for Tax Law and Public Finance; CMS Hasche Sigle

Andreas Gerten

Max Planck Institute for Tax Law and Public Finance

Maximilian Haag

Max Planck Institute for Tax Law and Public Finance

Sabine Heidenbauer

Vienna University, Institute for Austrian and International Taxlaw; Max Planck Institute for Tax Law and Public Finance

Carsten Hohmann

Max Planck Institute for Tax Law and Public Finance

Daniel Kornack

Max Planck Institute for Tax Law and Public Finance

Nadia Lagdali

Max Planck Institute for Tax Law and Public Finance

Lukas Mueller

University of St. Gallen; University of Zurich - Rechtswissenschaftliches Institut (School of Law)

Christine Osterloh-Konrad

Max Planck Institute for Tax Law and Public Finance

Carlo Pohlhausen

HgCapital; Max Planck Institute for Tax Law and Public Finance

Philipp Redeker

Max Planck Institute for Tax Law and Public Finance

Erik Röder

Max Planck Institute for Tax Law and Public Finance

Date Written: July 8, 2009

Abstract

The divide between debt and equity belongs to the focal points of national and international tax law. Under domestic individual income tax law, it is crucial for the distinction between a creditor-debtor relationship and a full partnership of taxpayers jointly carrying on a business. Under domestic corporate income tax law, it is decisive for the application of a two-layer taxation of corporate profits and dividends. Under international income tax law, the allocation of taxing rights and the application of withholding taxation follows largely the distinction between debt and equity. Against this background, this article analyses on a comparative basis the major features of debt and equity under corporate law, accounting law and tax law in six jurisdictions (Austria, France, Germany, Switzerland, United Kingdom, United States). It becomes clear that the debt-equity divide is shaped differently for purposes of individual income taxation, corporate income taxation and international income taxation. While individual or corporate income taxation largely looks at the similarities between a full partner or a full shareholder on the one hand and the holder of a hybrid debt instruments on the other hand, international tax rules tend to include all sorts of profit-dependent payments under the rules for corporate profits and dividends. It remains to be seen whether the dependency of payments on contingent profits (or other proprietary elements of a business entity like turnover) forms a convincing rationale for the existing distinctions between debt and equity in the international tax arena or whether tax policy should opt for full or near equal treatment of these financial instruments.

Keywords: Debt, equity, business tax, international tax, corporate law, corporate tax

Suggested Citation

Schön, Wolfgang and Beuchert, Tobias A. and Roesener, Astrid and Gerten, Andreas and Haag, Maximilian and Heidenbauer, Sabine and Hohmann, Carsten and Kornack, Daniel and Lagdali, Nadia and Mueller, Lukas and Osterloh-Konrad, Christine and Pohlhausen, Carlo and Redeker, Philipp and Röder, Erik, Debt and Equity: What's the Difference? A Comparative View (July 8, 2009). Max Planck Institute for Intellectual Property, Competition & Tax Law Research Paper No. 09-09, Available at SSRN: https://ssrn.com/abstract=1457649 or http://dx.doi.org/10.2139/ssrn.1457649

Wolfgang Schön (Contact Author)

Max Planck Institute for Tax Law and Public Finance, Department of Business and Tax Law ( email )

Marstallplatz 1
Munich, 80539
Germany

Tobias A. Beuchert

Max Planck Institute for Tax Law and Public Finance ( email )

Marstallplatz 1
Munich, 80539
Germany

Astrid Roesener

Max Planck Institute for Tax Law and Public Finance

Marstallplatz 1
Munich, 80539
Germany

CMS Hasche Sigle ( email )

Cologne
Germany

Andreas Gerten

Max Planck Institute for Tax Law and Public Finance ( email )

Marstallplatz 1
Munich, 80539
Germany

Maximilian Haag

Max Planck Institute for Tax Law and Public Finance ( email )

Marstallplatz 1
Munich, 80539
Germany

Sabine Heidenbauer

Vienna University, Institute for Austrian and International Taxlaw ( email )

Welthandelsplatz 1
Vienna, Wien 1020
Austria

Max Planck Institute for Tax Law and Public Finance

Marstallplatz 1
Munich, 80539
Germany

Carsten Hohmann

Max Planck Institute for Tax Law and Public Finance ( email )

Marstallplatz 1
Munich, 80539
Germany

Daniel Kornack

Max Planck Institute for Tax Law and Public Finance ( email )

Marstallplatz 1
Munich, 80539
Germany

Nadia Lagdali

Max Planck Institute for Tax Law and Public Finance ( email )

Marstallplatz 1
Munich, 80539
Germany

Lukas Mueller

University of St. Gallen ( email )

Varnbüelstrasse 19
St. Gallen, 9000
Switzerland

HOME PAGE: http://www.alexandria.unisg.ch/persons/Lukas_Mueller3

University of Zurich - Rechtswissenschaftliches Institut (School of Law) ( email )

Ramistrasse 74
CH-8001 Zurich
Switzerland

HOME PAGE: http://www.lexwiki.ch/author/lukas-mueller/

Christine Osterloh-Konrad

Max Planck Institute for Tax Law and Public Finance ( email )

Marstallplatz 1
Munich, 80539
Germany

Carlo Pohlhausen

HgCapital ( email )

Salvatorstraβe 3
Munich, 80333
Germany

Max Planck Institute for Tax Law and Public Finance ( email )

Marstallplatz 1
Munich, 80539
Germany

Philipp Redeker

Max Planck Institute for Tax Law and Public Finance ( email )

Marstallplatz 1
Munich, 80539
Germany

Erik Röder

Max Planck Institute for Tax Law and Public Finance ( email )

Marstallplatz 1
Munich, 80539
Germany

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