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

34 Pages Posted: 7 Oct 2006

See all articles by Thiess Buettner

Thiess Buettner

University of Erlangen-Nuremberg-Friedrich Alexander Universität Erlangen Nürnberg; CESifo (Center for Economic Studies and Ifo Institute)

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: 2006

Abstract

This paper analyzes the role of Thin-Capitalization rules for capital structure choice and investment decisions of multinationals. A theoretical analysis shows that the imposition of such rules tends to affect not only the leverage and the level of investment but also their tax-sensitivity. An empirical investigation of leverage and investment reported for affiliates of German multinationals in 24 countries in the period between 1996 and 2004 offers some support for the theoretical predictions. While Thin-Capitalization rules are found to be effective in restricting debt finance, investment is found to be more sensitive to taxes if debt finance is restricted.

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

JEL Classification: H25, H26, G32

Suggested Citation

Buettner, Thiess and Overesch, Michael and Schreiber, Ulrich and Wamser, Georg, The Impact of Thin-Capitalization Rules on Multinationals' Financing and Investment Decisions (2006). ZEW Discussion Paper No. 06-68, CESifo Working Paper Series No. 1817, Available at SSRN: https://ssrn.com/abstract=935220

Thiess Buettner (Contact Author)

University of Erlangen-Nuremberg-Friedrich Alexander Universität Erlangen Nürnberg ( email )

Lange Gasse 20
Nürnberg, Bavaria 90403
Germany

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

Poschinger Str. 5
Munich, DE-81679
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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