Hermann Buslei, Martin Simmler
In this study we investigate the impact of the thin capitalization rule newly introduced in Germany in 2008 on firms' capital structure, investment and profitability. The identification of the causal effects is based on the escape clauses within the regulation using a difference-in-difference approach. Our results suggest that firms strongly react to the new regulation in order to avoid the limited deductibility of interest expenses either by decreasing their debt ratio or by splitting the firms' assets to use the exemption limit. We further show that the effect on firms' investment depends on the firms' financial situation. Thus, negative investment effects are not found in general. With respect to the aim of restricting the profit shifting of multinational firms our results indicate that the sensitivity of investment to corporate income taxes increases for firms, which are affected by the thin capitalization rule. Moreover, our analysis shows that the newly introduced thin capitalization rule is quite successful in broadening the tax base.
Keywords: Thin capitalization, earnings stripping rule, debt ratio, profitability, investment