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Real effects of earnings stripping rules

Author

Listed:
  • De Simone, Lisa
  • Giese, Henning
  • Koch, Reinald
  • Rehrl, Christoph

Abstract

This study examines the real effects of earnings stripping rules introduced in the European Union in 2019, which tie interest deductibility to contemporaneous profitability. Exploiting a quasi-natural experiment created by the EU's harmonized implementation under the Anti-Tax Avoidance Directive and using a difference-in-differences design, we analyze consolidated data from 3,312 firms across 22 EU Member States from 2012 to 2023. We find that earnings stripping rules significantly reduce operational risk-taking, investment, and innovation, consistent with profit-contingent deductibility lowering the expected debt tax shield in low-profit years. These effects are particularly pronounced among firms with high pre-reform operating risk, which also experience slower growth and a higher likelihood of financial distress following the reform. This study contributes to the literature on corporate taxation and risk-taking, showing that profit-linked interest limitations have real effects and underscoring the importance of rule design in balancing anti-avoidance objectives with investment and innovation.

Suggested Citation

  • De Simone, Lisa & Giese, Henning & Koch, Reinald & Rehrl, Christoph, 2025. "Real effects of earnings stripping rules," arqus Discussion Papers in Quantitative Tax Research 306, arqus - Arbeitskreis Quantitative Steuerlehre.
    • Handle: RePEc:zbw:arqudp:325832
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    Keywords

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    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance
    • H87 - Public Economics - - Miscellaneous Issues - - - International Fiscal Issues; International Public Goods

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