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Thin-Capitalization Rules and Company Responses Experience from German Legislation

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  • Alfons Weichenrieder
  • Helen Windischbauer

Abstract

By granting intracompany loans to their foreign affiliates, multinational firms may reduce their tax liability abroad. Many countries have legislated thin-capitalization rules (TCRs) that limit the allowable levels of intracompany loans or restrict interest deductibility if certainthresholds are crossed. This paper empirically analyzes the effect of the German TCR on corporate policy. We find that tightening the regulations in 2001 had some limiting effect on leverage. Foreign affiliates reacted by reducing intracompany loans and increasing equity,with no significant evidence of reduced real investment. A possible reason for the limited impact of the TCR was that multinational firms had the option to work around the regulation by using holding company structures. Indeed, holding companies have been used to shift hugeamounts of intracompany loans onto the books of German affiliates. At the same time, however, only part of these observed reorganizations seem to have been a reaction to TCR.

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Bibliographic Info

Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 2456.

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Date of creation: 2008
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Handle: RePEc:ces:ceswps:_2456

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Related research

Keywords: multinational firm; debt; thin capitalization; financial structure;

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References

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  1. Mihir A. Desai & C. Fritz Foley & James R. Hines, Jr., 2003. "A Multinational Perspective on Capital Structure Choice and Internal Capital Markets," NBER Working Papers 9715, National Bureau of Economic Research, Inc.
  2. Andreas Haufler & Marco Runkel, 2008. "Firms’ Financial Choices and Thin Capitalization Rules under Corporate Tax Competition," CESifo Working Paper Series 2429, CESifo Group Munich.
  3. Altshuler, Rosanne & Grubert, Harry, 2003. "Repatriation taxes, repatriation strategies and multinational financial policy," Journal of Public Economics, Elsevier, Elsevier, vol. 87(1), pages 73-107, January.
  4. Rosanne Altshuler & Jack Mintz, 1996. "U.S. Interest Allocation Rules: Effects and Policy," Departmental Working Papers, Rutgers University, Department of Economics 199410, Rutgers University, Department of Economics.
  5. Clemens Fuest & Thomas Hemmelgarn, 2003. "Corporate Tax Policy, Foreign Firm Ownership and Thin Capitalization," CESifo Working Paper Series 1096, CESifo Group Munich.
  6. Johannes Becker & Clemens Fuest & Thomas Hemmelgarn, 2006. "Corporate Tax Reform and Foreign Direct Investment in Germany – Evidence from Firm-Level Data," CESifo Working Paper Series 1722, CESifo Group Munich.
  7. Thiess Buettner & Michael Overesch & Ulrich Schreiber & Georg Wamser, 2006. "The Impact of Thin-Capitalization Rules on Multinationals' Financing and Investment Decisions," Working Papers, University of Kentucky, Institute for Federalism and Intergovernmental Relations 2006-06, University of Kentucky, Institute for Federalism and Intergovernmental Relations.
  8. Alfons J. Weichenrieder & Jack Mintz, 2008. "What determines the use of holding companies and ownership chains?," Working Papers, Oxford University Centre for Business Taxation 0803, Oxford University Centre for Business Taxation.
  9. Jack Mintz & Alfons Weichenrieder, 2005. "Taxation and the Financial Structure of German Outbound FDI," CESifo Working Paper Series 1612, CESifo Group Munich.
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Cited by:
  1. Haufler, Andreas & Runkel, Marco, 2012. "Firms’ financial choices and thin capitalization rules under corporate tax competition," Munich Reprints in Economics, University of Munich, Department of Economics 20421, University of Munich, Department of Economics.
  2. Georg Wamser, 2008. "The Impact of Thin-Capitalization Rules on External Debt Usage – A Propensity Score Matching Approach," Ifo Working Paper Series Ifo Working Paper No. 62, Ifo Institute for Economic Research at the University of Munich.
  3. Jennifer Blouin & Harry Huizinga & Luc Laeven & Gaetan Nicodeme, 2014. "Thin Capitalization Rules and Multinational Firm Capital Structure," IMF Working Papers 14/12, International Monetary Fund.
  4. Schindler, Dirk & Schjelderup, Guttorm, 2012. "Debt shifting and ownership structure," European Economic Review, Elsevier, Elsevier, vol. 56(4), pages 635-647.
  5. Schindler, Dirk & Schjelderup, Guttorm, 2008. "Multinationals, Minority Ownership and Tax-Efficient Financing Structures," Discussion Papers, Department of Business and Management Science, Norwegian School of Economics 2008/19, Department of Business and Management Science, Norwegian School of Economics.
  6. Egger, Peter & Wamser, Georg, 2011. "The Impact of Controlled Foreign Company Legislation on Real Investments Abroad: A Two-dimensional Regression Discontinuity Design," CEPR Discussion Papers, C.E.P.R. Discussion Papers 8460, C.E.P.R. Discussion Papers.
  7. Buettner, Thiess & Overesch, Michael & Schreiber, Ulrich & Wamser, Georg, 2012. "The impact of thin-capitalization rules on the capital structure of multinational firms," Journal of Public Economics, Elsevier, Elsevier, vol. 96(11), pages 930-938.

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