Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/325832 
Year of Publication: 
2025
Series/Report no.: 
arqus Discussion Paper No. 306
Publisher: 
Arbeitskreis Quantitative Steuerlehre (arqus), Berlin
Abstract: 
This study examines the real effects of earnings stripping rules introduced in the European Union in 2019, which tie interest deductibility to contemporaneous profitability. Exploiting a quasi-natural experiment created by the EU's harmonized implementation under the Anti-Tax Avoidance Directive and using a difference-in-differences design, we analyze consolidated data from 3,312 firms across 22 EU Member States from 2012 to 2023. We find that earnings stripping rules significantly reduce operational risk-taking, investment, and innovation, consistent with profit-contingent deductibility lowering the expected debt tax shield in low-profit years. These effects are particularly pronounced among firms with high pre-reform operating risk, which also experience slower growth and a higher likelihood of financial distress following the reform. This study contributes to the literature on corporate taxation and risk-taking, showing that profit-linked interest limitations have real effects and underscoring the importance of rule design in balancing anti-avoidance objectives with investment and innovation.
Subjects: 
corporate risk-taking
capital structure
asymmetric taxation
earnings stripping rule
JEL: 
G32
G33
H25
H26
H87
Document Type: 
Working Paper

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