Abstract
Multinational financial decisions are a central aspect of multinational parent companies (MNCs) managerial strategy. Investments must be financed in some way. However, there are always financing alternatives that can be considered. International competitive strategies of managers involve cross-border complexities. Choices about investment, organizational and internal financial structure involve international considerations. How do tax considerations factor into MNCs management strategies and internal financial decision-making? In this regard, ( US) MNCs often use intra-group cross-border debt financing structures in order to optimize the effective tax rate (ETR) of high-taxed German affiliates. However, the new German thin capitalization (hereinafer 'thin cap') provision (German interest barrier) restricts this financial tax planning approach significantly. Currently, tax-effective income shifting from German subsidiaries to low-taxed intra-group finance companies by internal debt financing is limited to 30% of the taxable earnings before interest, tax, depreciation, and amortization (EBITDA) per fiscal year. Thus, the German thin cap provision has a major impact in terms of the value of the debt tax shield. Therefore, the way US MNCs configurate the entrepreneurial capital structure of German subsidiaries (equity versus debt capitalization) is extremely tax driven and affected by German thin cap rules. This paper shows a new and innovative tax-efficient internal debt financing structure for US MNCs that has been developed to optimize the net after-tax profits of German operative affiliates. This new and flexible internal financial structure allows US MNCs unlimited internal debt financing of German subsidiaries without the harmful effects of the German thin cap provision. However, the scope of the application of the new intra-group debt financing structure is not limited to US MNCs. This investment and financing structure is also of high importance for global investors engaged in direct investments in Germany.
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