Interest deductibility restrictions and organizational form

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Blaufus, Kay; Kreinacke, Marcos; Mantei, Britta: Interest deductibility restrictions and organizational form. In: Business Research 8 (2014), Nr. 1, S. 3-37. DOI:

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Sum total of downloads: 54

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.
License of this version: CC BY 4.0 Unported
Document Type: Article
Publishing status: publishedVersion
Issue Date: 2014
Appears in Collections:Wirtschaftswissenschaftliche Fakultät

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pos. country downloads
total perc.
1 image of flag of Germany Germany 31 57.41%
2 image of flag of United States United States 9 16.67%
3 image of flag of China China 5 9.26%
4 image of flag of No geo information available No geo information available 1 1.85%
5 image of flag of Taiwan Taiwan 1 1.85%
6 image of flag of Pakistan Pakistan 1 1.85%
7 image of flag of Latvia Latvia 1 1.85%
8 image of flag of France France 1 1.85%
9 image of flag of Czech Republic Czech Republic 1 1.85%
10 image of flag of Belgium Belgium 1 1.85%
    other countries 2 3.70%

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