Zinsabzugsbeschränkung durch die Zinsschranke, Fremdkapitalsteuerschild und unternehmerische Kapitalstrukturentscheidungen (Interest Barrier-Induced Interest Deduction Restrictions, the Debt Capital Tax Shield, and Entrepreneurial Capital Structure Decisions )

Arqus Quantative Tax Research Discussion Paper No. 100

49 Pages Posted: 10 Sep 2012 Last revised: 14 Feb 2013

See all articles by Tasja Klotzkowski

Tasja Klotzkowski

University of Passau

Massbaum Alexandra

University of Paderborn - Faculty of Business Administration, Economics and Business Computing

Caren Sureth-Sloane

Paderborn University; Vienna University of Economics and Business; TRR 266 Accounting for Transparency

Date Written: April 1, 2010

Abstract

Legal minimum equity capital requirements aside, shareholders can generally freely decide whether to finance their companies with equity or debt capital. While it is a known fact that debt capital is generally tax-favored, in their annual financial statements many corporations report equity capital in excess of the minimum legal requirement. The shareholders' financing decisions may be motivated by special tax rules that were implemented in many countries in recent years (e.g., thin capitalization, interest barrier) in order to scale back the extent of debt financing and to prevent misuse of the debt financing option. A secondary aim of these special rules – which in Germany recently arrived in the shape of an interest barrier in order to protect the national tax base – is to increase companies' equity ratio. A significant stream in financial economics research has been dedicated to the complex problem of corporate capital structure decisions for many decades now. A number of these studies focus on the interest barrier. However, prior research in this field has so far mainly concentrated on how many companies are affected by this rule. So far there has been no attempt to examine the impact of the interest barrier on corporate decision-making concerning the capital structure. This paper uses model calculations to look at how the interest barrier influences the economic benefits of such corporate decisions. The aim is to find out whether the rule always causes investors to prefer equity financing over debt financing. We incorporate the interest barrier in Miller's (1977) capital structure model in order to analyze the barrier's influence on corporate financing decisions. It is demonstrated how the individual parameters in the various scenarios impact on the critical income tax rate. We find that whenever the individual income tax rate is in the interval of possible income tax rates, the equity versus debt capital decision may become irrelevant. We can conclude that, as a rule, both the model with a tax barrier and one without a deduction restriction can lead to a so-called 'Miller equilibrium'. It also emerges that the interest barrier causes debt financing to become a less attractive option. Because the amount of deductible interest depends on gross income, this indicator has a strong influence on the critical income tax rate. The lower the gross income, the less attractive the debt financing option.

Keywords: business taxation, capital structure, corporate taxation, interest barrier, Miller equilibrium, shareholder debt financing

JEL Classification: G32, H21, H25

Suggested Citation

Klotzkowski, Tasja and Alexandra, Massbaum and Sureth-Sloane, Caren, Zinsabzugsbeschränkung durch die Zinsschranke, Fremdkapitalsteuerschild und unternehmerische Kapitalstrukturentscheidungen (Interest Barrier-Induced Interest Deduction Restrictions, the Debt Capital Tax Shield, and Entrepreneurial Capital Structure Decisions ) (April 1, 2010). Arqus Quantative Tax Research Discussion Paper No. 100, Available at SSRN: https://ssrn.com/abstract=2135728 or http://dx.doi.org/10.2139/ssrn.2135728

Tasja Klotzkowski

University of Passau ( email )

Innstrasse 27
Passau, 94032
Germany

Massbaum Alexandra

University of Paderborn - Faculty of Business Administration, Economics and Business Computing ( email )

Warburger Str. 100
D-33098 Paderborn
Germany

Caren Sureth-Sloane (Contact Author)

Paderborn University ( email )

Warburger Str. 100
Paderborn, 33098
Germany

Vienna University of Economics and Business ( email )

Welthandelsplatz 1
Vienna, Wien 1020
Austria

TRR 266 Accounting for Transparency ( email )

Warburger Straße 100
Paderborn, 33098
Germany

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