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

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  • Thiess Büttner
  • Michael Overesch
  • Ulrich Schreiber
  • Georg Wamser

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.

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File URL: http://www.cesifo-group.de/portal/page/portal/DocBase_Content/WP/WP-CESifo_Working_Papers/wp-cesifo-2006/wp-cesifo-2006-10/cesifo1_wp1817.pdf
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Bibliographic Info

Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 1817.

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Date of creation: 2006
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Handle: RePEc:ces:ceswps:_1817

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Keywords: corporate income tax; multinationals; leverage; Thin-Capitalization rules; firm-level data;

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References

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  14. Keen, Michael, 2001. "Preferential Regimes Can Make Tax Competition Less Harmful," National Tax Journal, National Tax Association, vol. 54(n. 4), pages 757-62, December .
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