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The Impact of Thin Capitalization Rules on Subsidiary Financing: Evidence from Belgium

  • Dave GoyvaertsEmail author
  • Annelies Roggeman
Article
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Abstract

In order to prevent excessive profit shifting using internal debt by multinational firms, several countries have introduced thin capitalization rules limiting the deductibility of interests on internal loans. While prior research has consistently found that firms affected by thin capitalization rules reduce their internal debt-to-equity ratio, the means through which this reduction is achieved are understudied. This paper employs a Comparative Interrupted Time Series methodology to identify the short-term effects of newly introduced thin capitalization rules on subsidiaries’ financing preferences, using a new dataset of detailed firm-level accounting data. The results indicate a reduction in internal debt and an increase in equity for affected firms, both by an increase in paid-up capital and by an increase in retained earnings. These findings about the way firms react may help lawmakers to estimate impact of future tax regulations.

Keywords

Thin capitalization rules Corporate taxation Internal debt Corporate financing decisions Profit shifting 

JEL Classification

G32 H25 F23 

Notes

Funding

Funding was provided by Universiteit Gent.

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Copyright information

© Springer Science+Business Media, LLC, part of Springer Nature 2019

Authors and Affiliations

  1. 1.Department of Accounting, Corporate Finance and TaxationGhent UniversityGhentBelgium

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