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

Martin Ruf
  • Corresponding author
  • 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
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/ Dirk Schindler
  • Norwegian School of Economics, NoCeT and CESifo; Norwegian School of Economics, Department of Accounting, Auditing and Law, Helleveien 30, 5045 Bergen, Norway
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Published Online: 2015-09-25 | DOI: https://doi.org/10.1515/ntaxj-2015-0002


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.


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About the article

Received: 2014-10-20

Accepted: 2015-03-01

Published Online: 2015-09-25

Published in Print: 2015-09-01

Citation Information: Nordic Tax Journal, Volume 2015, Issue 1, Pages 17–33, ISSN (Online) 2246-1809, DOI: https://doi.org/10.1515/ntaxj-2015-0002.

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© 2015. This work is licensed under the Creative Commons Attribution-NonCommercial-NoDerivatives 3.0 License. BY-NC-ND 3.0

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