The Impact of Thin Capitalization Rules on Shareholder Financing

From a tax planner’s point of view, it is often attractive to choose debt over equity finan-cing. As this has led to an increase of debt financing of corporations, many countries haveintroduced thin capitalization rules to secure their tax revenues. We analyze the influenceof section 8a of the German Corporate Tax Code on corporate capital structure decisions.Furthermore, the impact of the new interest barrier is taken into consideration. The exi-stence of the Miller equilibrium as well as definite financing effects depend significantlyon the fraction of long-term debt, of substantial shareholders and when capital gains arerealized.