Effects of introducing a general interest barrier - Evidence from the German corporate tax reform 2008
In this study we investigate the impact of the thin capitalization rule (TCR) introduced in Germany in 2008 on firms; capital structure, investment and profitability. Since all firms are better off by avoiding the TCR, this means analyzing firms; behavior to avoid the TCR. The identification of the causal effects is based on the escape clauses in the regulation using a difference-in-difference approach. Our results present evidence that firms strongly react (to the new regulation) in order to avoid the limited deductibility of interest expenses: They either decrease their debt ratio or split their assets to use the exemption limit. The latter is especially used by firms with an interest result around the exemption limit of the interest barrier. In general no negative investment effects are caused in the short run by the TCR. This suggests that a part of the firms is able to substitute equity for debt at low costs or expects to be able to circumvent the regulation. However, investment might also be fixed in the short-run for example due to long-lasting contracts. Moreover, our results suggest that the TCR is quite successful in broadening the tax base in the short-run.