The Discussion Papers series presents results from ongoing research projects and other research and analysis by SSB staff, intended for international journals or books. The views and conclusions in this document are those of the author(s).
We evaluate the impact of thin capitalization rules, which commonly feature such escape clauses, by exploiting the introduction of these rules in Norway in 2014. Combining difference-indifferences, regression discontinuity and bunching estimates, we show that what appears to be a strong response in the capital structure among exposed firms primarily reflect within-group reallocation of debt to avoid exposure to the rules through escape clauses. We observe sharp bunching among both new and existing subsidiaries at both thresholds for rule inclusion, and find that internal corporate group debt is offloaded to these bunching subsidiaries in order to avoid additional tax costs. As a result, significant and large effects on firm-level capital structure in response to the thin capitalization rules is driven by reshuffling of capital within corporate groups with little real effects. Re-estimating the difference-indifference specification at the corporate group level confirms this finding, questioning the extent to which thin capitalization rules have the intended effect due to the presence of escape clauses.