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The fellowship of the thin capitalization rules : an empirical analysis of the effect of earnings stripping rules in Norway, Finland, Spain and Germany

Løkholm, Jørgen; Thornes, Kristoffer
Master thesis
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URI
http://hdl.handle.net/11250/2487635
Date
2017
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  • Master Thesis [3258]
Abstract
Governments across Europe have recently introduced tax reforms to counter the growing

problem of multinational companies exploiting loopholes in tax regulations. We have

analysed the effect of one type of tax regulation, earnings stripping rules, in selected

European countries. Specifically, we study how the capital structure of multinational firms in

Germany, Spain, Finland and Norway are affected when subjected to a transition from either

safe harbour rules or from no prior regulations, to earnings stripping rules.

Firms analysed in Spain, Finland and Norway were not previously regulated by thin

capitalization rules, and we find significant evidence of a reduction in the total debt-to-asset

ratio as a response to the introduction of the earnings stripping rules. In Germany, we find

evidence of an increase in the total debt-to-asset ratio as a response to the transition from

safe harbour rules to earnings stripping rules.

We conclude that firms without prior regulation will reduce their debt levels, when being

subject to an earnings stripping rule. However, the effect of earning stripping rules in

countries with prior regulations is dependent on the relative tightness of the new and old

rules.

For Finland, Spain and Norway we believe the earnings stripping rules have had the desired

effect, as MNCs of these countries have reduced their total debt-to-asset ratio. Whether the

German rules have had the desired effect is inconclusive, but we argue that the earnings

stripping rules are an improvement on the previous legislation.

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