Debt Shifting in Europe

This article aims to analyze the link between subsidiary capital structure and taxation in Europe. First we have introduced a trade-off model, which looks at a MNC???s financial strategy and in particular debt shifting from low-tax to high-tax jurisdictions. By letting the MNC choose both leverage and the debt shifting percentage, we depart from the relevant literature which has mainly focused on the latter. Using the AMADEUS dataset we show that: (i) in line with the relevant literature, subsidiary leverage increases with its tax rate; (ii) contrary to previous work, the parent company tax rate does not have a negative effect on subsidiary leverage. More specifically, its effect is estimated to be nil when statutory tax rates are used. When, however, effective marginal tax rates (EMTRs), accounting for cross-border effects, are used, the impact of parent company taxation on subsidiary leverage is positive.