Details
| Original language | English |
|---|---|
| Pages (from-to) | 3-37 |
| Number of pages | 35 |
| Journal | Business Research |
| Volume | 8 |
| Issue number | 1 |
| Early online date | 10 Dec 2014 |
| Publication status | Published - Oct 2015 |
Abstract
Using a theoretical model for risky investment decisions, we study the effect of interest deductibility restrictions on the choice of organizational form. We analyze the two most widely used approaches: first, rules that limit the interest deductibility if the firm’s leverage exceeds a specific level, and second, rules that restrict the interest deduction if the interest expenses exceed a specific percentage of the firm’s earnings. Although these restrictions apply uniformly for partnerships and corporations in many countries, we find that they usually distort the choice of organizational form. We demonstrate that only leverage-based interest deductibility restrictions can in theory be modified to achieve organizational form neutrality. However, this requires a legal form dependent application or absence of dividend taxation and in any case a full loss offset which is in contrast to current law in many countries. If one considers corporate loss offset limitations, both types of interest deductibility restrictions always distort the choice of organizational form. Thus, the introduction of interest deductibility restrictions is actually in conflict with the legislators’ often declared aim to design tax systems that are neutral with respect to the choice of organizational form.
Keywords
- Choice of legal form, Liability limitation, Organizational form neutrality, Thin capitalization
ASJC Scopus subject areas
- Business, Management and Accounting(all)
- Business, Management and Accounting (miscellaneous)
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In: Business Research, Vol. 8, No. 1, 10.2015, p. 3-37.
Research output: Contribution to journal › Article › Research › peer review
}
TY - JOUR
T1 - Interest deductibility restrictions and organizational form
AU - Blaufus, Kay
AU - Kreinacke, Marcos
AU - Mantei, Britta
N1 - Publisher Copyright: © 2014, The Author(s).
PY - 2015/10
Y1 - 2015/10
N2 - Using a theoretical model for risky investment decisions, we study the effect of interest deductibility restrictions on the choice of organizational form. We analyze the two most widely used approaches: first, rules that limit the interest deductibility if the firm’s leverage exceeds a specific level, and second, rules that restrict the interest deduction if the interest expenses exceed a specific percentage of the firm’s earnings. Although these restrictions apply uniformly for partnerships and corporations in many countries, we find that they usually distort the choice of organizational form. We demonstrate that only leverage-based interest deductibility restrictions can in theory be modified to achieve organizational form neutrality. However, this requires a legal form dependent application or absence of dividend taxation and in any case a full loss offset which is in contrast to current law in many countries. If one considers corporate loss offset limitations, both types of interest deductibility restrictions always distort the choice of organizational form. Thus, the introduction of interest deductibility restrictions is actually in conflict with the legislators’ often declared aim to design tax systems that are neutral with respect to the choice of organizational form.
AB - Using a theoretical model for risky investment decisions, we study the effect of interest deductibility restrictions on the choice of organizational form. We analyze the two most widely used approaches: first, rules that limit the interest deductibility if the firm’s leverage exceeds a specific level, and second, rules that restrict the interest deduction if the interest expenses exceed a specific percentage of the firm’s earnings. Although these restrictions apply uniformly for partnerships and corporations in many countries, we find that they usually distort the choice of organizational form. We demonstrate that only leverage-based interest deductibility restrictions can in theory be modified to achieve organizational form neutrality. However, this requires a legal form dependent application or absence of dividend taxation and in any case a full loss offset which is in contrast to current law in many countries. If one considers corporate loss offset limitations, both types of interest deductibility restrictions always distort the choice of organizational form. Thus, the introduction of interest deductibility restrictions is actually in conflict with the legislators’ often declared aim to design tax systems that are neutral with respect to the choice of organizational form.
KW - Choice of legal form
KW - Liability limitation
KW - Organizational form neutrality
KW - Thin capitalization
UR - http://www.scopus.com/inward/record.url?scp=85058267657&partnerID=8YFLogxK
U2 - 10.1007/s40685-014-0016-6
DO - 10.1007/s40685-014-0016-6
M3 - Article
AN - SCOPUS:85058267657
VL - 8
SP - 3
EP - 37
JO - Business Research
JF - Business Research
SN - 2198-3402
IS - 1
ER -