Thin-Capitalization Rules and Company Responses Experience from German Legislation

Alfons J. Weichenrieder, Helen Windischbauer and Alfons Weichenrieder
Authors registered in the RePEc Author Service: Alfons J. Weichenrieder

No 2456, CESifo Working Paper Series from CESifo

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 certain thresholds 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 huge amounts 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.

Keywords: multinational firm; debt; thin capitalization; financial structure (search for similar items in EconPapers)
JEL-codes: G38 H25 (search for similar items in EconPapers)
Date: 2008
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (55)

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