Advanced Search
MyIDEAS: Login to save this article or follow this journal

Investigating a thin-capitalization rule: An option-based analysis


Author Info

  • Jan Vlachý
Registered author(s):


    The Czech tax system is undergoing radical transformation. Among the many forthcoming changes, several features can be identified, which alter the structure of tax asymmetries. This paper uses an option-based model of direct taxation to examine a controversial new thin-capitalization rule, stipulating a mandatory benchmark for deductible unrelated-party loan expenses. We estimate the costs of debt under various risk-related scenarios, focusing on particular situations where the new regulation may result in distortions of business incentives and investment behaviour. We find that the measure can disproportionally increase the marginal cost of debt for companies with relatively risky business profiles. In particular, if the law were followed strictly, it could create effective barriers to further growth under perfectly realistic combinations of leverage and business risk. Another asymmetry arises due to a small-business exemption which can make new investment prohibitive when its cap is being reached. The model also suggests that non-deductibility of interest increases credit risk and could, in the longer term, contribute to a slack in SME lending.

    Download Info

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
    File URL:
    Download Restriction: free of charge, full text delayed 1 year

    File URL:
    Download Restriction: free of charge, full text delayed 1 year

    As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.

    Bibliographic Info

    Article provided by University of Economics, Prague in its journal Politická ekonomie.

    Volume (Year): 2008 (2008)
    Issue (Month): 5 ()
    Pages: 656-668

    as in new window
    Handle: RePEc:prg:jnlpol:v:2008:y:2008:i:5:id:657:p:656-668

    Contact details of provider:
    Postal: nam. W. Churchilla 4, 130 67 Praha 3
    Phone: (02) 24 09 51 11
    Fax: (02) 24 22 06 57
    Web page:
    More information through EDIRC

    Order Information:
    Postal: Redakce Politické ekonomie, Vysoká škola ekonomická, nám. W. Churchilla 4, 130 67 Praha 3

    Related research

    Keywords: real options; thin capitalization; tax asymmetry; Merton model of debt;

    Find related papers by JEL classification:


    No references listed on IDEAS
    You can help add them by filling out this form.



    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.


    Access and download statistics


    When requesting a correction, please mention this item's handle: RePEc:prg:jnlpol:v:2008:y:2008:i:5:id:657:p:656-668. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Vaclav Subrta).

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.