<abstract xmlns="http://www.w3.org/1999/xhtml"><p> This paper presents the general design of thin-capitalization rules and summarizes the economic effects of such rules as identified in theoretical models. We review empirical studies providing evidence on the experience with (German) thin-capitalization rules as well as on the adjustment of German multinationals to foreign thin-capitalization rules. Special emphasis is given to the development in Germany, because Germany went a long way in limiting interest deductibility by enacting a drastic change in its thin-capitalization rules in 2008, and because superb German data on multinational finance allows for testing several aspects consistently. We then discuss the experience of the Nordic countries with thin-capitalization rules. Briefly reviewing potential alternatives as well, we believe that the arm’s-length principle is administratively too costly and impracticable, whereas we argue that controlled-foreign-company rules might be another promising avenue for limiting internal debt shifting. Fundamental tax reforms towards a system with either "allowance for corporate equity" (ACE) or a "comprehensive business income tax" (CBIT) should also eliminate any thin-capitalization incentive.</p></abstract>

This paper presents the general design of thin-capitalization rules and summarizes the economic effects of such rules as identified in theoretical models. We review empirical studies providing evidence on the experience with (German) thin-capitalization rules as well as on the adjustment of German multinationals to foreign thin-capitalization rules. Special emphasis is given to the development in Germany, because Germany went a long way in limiting interest deductibility by enacting a drastic change in its thin-capitalization rules in 2008, and because superb German data on multinational finance allows for testing several aspects consistently. We then discuss the experience of the Nordic countries with thin-capitalization rules. Briefly reviewing potential alternatives as well, we believe that the arm’s-length principle is administratively too costly and impracticable, whereas we argue that controlled-foreign-company rules might be another promising avenue for limiting internal debt shifting. Fundamental tax reforms towards a system with either "allowance for corporate equity" (ACE) or a "comprehensive business income tax" (CBIT) should also eliminate any thin-capitalization incentive.

Debt Shifting and Thin-Capitalization Rules – German Experience and Alternative Approaches

Eberhard Karls Universität Tübingen and No- CeT; Lehrstuhl für BWL, insb. International Business Taxation, Wirtschafts- und Sozialwissenschaftliche Fakultät, Eberhard Karls Universität Tübingen, Nauklerstr. 47, 72074 Tübingen

Norwegian School of Economics, NoCeT and CESifo; Norwegian School of Economics, Department of Accounting, Auditing and Law, Helleveien 30, 5045 Bergen, Norway

Nordic Tax Journal

This work is licensed under the Creative Commons Attribution-NonCommercial-NoDerivatives 3.0 License.

This paper presents the general design of thin-capitalization rules and summarizes the economic effects of such rules as identified in theoretical models. We...

Debt Shifting and Thin-Capitalization Rules – German Experience and Alternative Approaches

Published Online: Sep 25, 2015

Page range: 17 - 33

Received: Oct 20, 2014

Accepted: Mar 01, 2015

DOI: https://doi.org/10.1515/ntaxj-2015-0002

© 2015

This work is licensed under the Creative Commons Attribution-NonCommercial-NoDerivatives 3.0 License.