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Thin-Capitalization Rules and Company Responses Experience from German Legislation

Author

Listed:
  • Alfons J. Weichenrieder
  • Helen Windischbauer
  • Alfons Weichenrieder
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.

Suggested Citation

  • Alfons J. Weichenrieder & Helen Windischbauer & Alfons Weichenrieder, 2008. "Thin-Capitalization Rules and Company Responses Experience from German Legislation," CESifo Working Paper Series 2456, CESifo.
    • Handle: RePEc:ces:ceswps:_2456
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    References listed on IDEAS

    as
    1. Haufler, Andreas & Runkel, Marco, 2012. "Firms' financial choices and thin capitalization rules under corporate tax competition," European Economic Review, Elsevier, vol. 56(6), pages 1087-1103.
    2. Overesch, Michael & Wamser, Georg, 2006. "German inbound investment, corporate tax planning, and thin-capitalization rules: a difference-in-differences approach," ZEW Discussion Papers 06-075, ZEW - Leibniz Centre for European Economic Research.
    3. Altshuler, Rosanne & Grubert, Harry, 2003. "Repatriation taxes, repatriation strategies and multinational financial policy," Journal of Public Economics, Elsevier, vol. 87(1), pages 73-107, January.
    4. Thiess Buettner & Michael Overesch & Ulrich Schreiber & Georg Wamser, 2006. "The Impact of Thin-Capitalization Rules on Multinationals' Financing and Investment Decisions," Working Papers 2006-06, University of Kentucky, Institute for Federalism and Intergovernmental Relations.
    5. Fuest, Clemens & Hemmelgarn, Thomas, 2005. "Corporate tax policy, foreign firm ownership and thin capitalization," Regional Science and Urban Economics, Elsevier, vol. 35(5), pages 508-526, September.
    6. Jack Mintz & Alfons J. Weichenrieder & Alfons Weichenrieder, 2005. "Taxation and the Financial Structure of German Outbound FDI," CESifo Working Paper Series 1612, CESifo.
    7. repec:bla:jfinan:v:59:y:2004:i:6:p:2451-2487 is not listed on IDEAS
    8. Rosanne Altshuler & Jack Mintz, 1995. "U.S. interest-allocation rules: Effects and policy," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 2(1), pages 7-35, February.
    9. Alfons J. Weichenrieder & Jack Mintz, 2008. "What determines the use of holding companies and ownership chains?," Working Papers 0803, Oxford University Centre for Business Taxation.
    10. 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.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    multinational firm; debt; thin capitalization; financial structure;
    All these keywords.

    JEL classification:

    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies

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