The European Commission has recently published working paper N.42, entitled “Thin Capitalization Rules and Multinational Firm Capital Structure” This paper examines the impact of thin capitalization rules (that limit the tax deductibility of interest) on the capital structure of the foreign affiliates of US multinationals. The study is based on a new data set on thin capitalization rules in 54 countries for the period 1982-2004.

The authors of the paper considered that this issue has not previously received sufficient attention. The paper concludes that thin capitalization rules have a considerable effect on capital structure. This has implications for the market valuation of companies.