Real effects of earnings stripping rules

Lisa De Simone, Henning Giese, Reinald Koch and Christoph Rehrl

No 306, arqus Discussion Papers in Quantitative Tax Research from arqus - Arbeitskreis Quantitative Steuerlehre

Abstract: This study examines the real effects of earnings stripping rules introduced in the European Union in 2019, which tie interest deductibility to contemporaneous profitability. Exploiting a quasi-natural experiment created by the EU's harmonized implementation under the Anti-Tax Avoidance Directive and using a difference-in-differences design, we analyze consolidated data from 3,312 firms across 22 EU Member States from 2012 to 2023. We find that earnings stripping rules significantly reduce operational risk-taking, investment, and innovation, consistent with profit-contingent deductibility lowering the expected debt tax shield in low-profit years. These effects are particularly pronounced among firms with high pre-reform operating risk, which also experience slower growth and a higher likelihood of financial distress following the reform. This study contributes to the literature on corporate taxation and risk-taking, showing that profit-linked interest limitations have real effects and underscoring the importance of rule design in balancing anti-avoidance objectives with investment and innovation.

Keywords: corporate risk-taking; capital structure; asymmetric taxation; earnings stripping rule (search for similar items in EconPapers)
JEL-codes: G32 G33 H25 H26 H87 (search for similar items in EconPapers)
Date: 2025
New Economics Papers: this item is included in nep-acc and nep-eur
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