The Impact of Thin-Capitalization Rules on Multinationals' Financing and Investment Decisions

56 Pages Posted: 8 Jun 2016

See all articles by Thiess Büttner

Thiess Büttner

CESifo (Center for Economic Studies and Ifo Institute) - Ifo Institute; Ludwig Maximilian University of Munich (LMU)

Michael Overesch

Universität zu Köln

Ulrich Schreiber

University of Mannheim - Department of Business Administration and Taxation; Centre for European Economic Research (ZEW)

Georg Wamser

University of Tuebingen; ETH Zurich

Date Written: 2008

Abstract

This paper analyzes the effectiveness of thin-capitalization rules in preventing debt finance by intercompany loans and explores their consequences for corporate decisions. A theoretical discussion emphasizes that limitations of the deduction of interest owed to foreign affiliates would not only affect multinationals' capital structure choice but also investment. An empirical investigation exploits a large firm-level panel dataset of multinationals in order to analyze the impact of thin-capitalization rules on capital structure choice and investment in the OECD and some further European countries in the time period between 1996 and 2004. The results indicate that thin-capitalization rules are effective in curbing tax planning via intercompany loans. However, investment is found to be adversely affected.

Keywords: Corporate Income Tax, Multinationals, Leverage, Thin-Capitalization Rules, Firm-Level Data

JEL Classification: G32, H26, H25

Suggested Citation

Büttner, Thiess and Overesch, Michael and Schreiber, Ulrich and Wamser, Georg, The Impact of Thin-Capitalization Rules on Multinationals' Financing and Investment Decisions (2008). Bundesbank Series 1 Discussion Paper No. 2008,03. Available at SSRN: https://ssrn.com/abstract=2785182

Thiess Büttner (Contact Author)

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

Poschinger Str. 5
Munich, 01069
Germany

Ludwig Maximilian University of Munich (LMU)

Geschwister-Scholl-Platz 1
Munich, Bavaria 80539
Germany

Michael Overesch

Universität zu Köln ( email )

Albertus-Magnus-Platz
WiSo-Gebäude
Cologne, 50923
Germany
0221/470-5605 (Phone)

HOME PAGE: http://www.steuer.uni-koeln.de/

Ulrich Schreiber

University of Mannheim - Department of Business Administration and Taxation ( email )

D-68131 Mannheim
Germany
+49 621 181 1718 (Phone)
+49 621 181 1716 (Fax)

Centre for European Economic Research (ZEW)

D-68161 Mannheim
Germany

Georg Wamser

University of Tuebingen ( email )

Wilhelmstr. 19
72074 Tuebingen, Baden Wuerttemberg 72074
Germany

ETH Zurich ( email )

Weinbergstr. 35
Zurich, 8003
Switzerland

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