Submitted July 2012.
The Capital Structure of Large Firms and the Use of Dutch Financing Entities†
Article first published online: 2 JUN 2014
© 2014 The Author Fiscal Studies © 2014 Institute for Fiscal Studies
Volume 35, Issue 2, pages 139–164, June 2014
How to Cite
Weyzig, F. (2014), The Capital Structure of Large Firms and the Use of Dutch Financing Entities. Fiscal Studies, 35: 139–164. doi: 10.1111/j.1475-5890.2014.12026.x
- Issue published online: 2 JUN 2014
- Article first published online: 2 JUN 2014
- capital structure;
- debt shifting;
- withholding tax;
- special purpose entities
Large firms may issue debt securities to obtain external financing or set up lowly-taxed affiliates for internal debt-shifting purposes. In addition, they may channel interest payments through Dutch special purpose entities (SPEs) to avoid withholding taxes, a widely-used arbitrage strategy. Analysing the capital structure of large EU-based multinationals, this paper provides evidence that the use of Dutch-issuing SPEs is associated with higher debt financing relative to equity. Furthermore, it shows that EU subsidiaries of larger firms are more leveraged and that the use of Dutch on-lending SPEs is also associated with higher subsidiary leverage. Thus, the paper provides evidence that Dutch SPEs facilitate higher external debt financing as well as internal debt shifting. The findings indicate that withholding taxes on interest payments to entities outside the EU, determined by individual EU member states, are not very effective. The national tax systems of EU countries such as the Netherlands, which does not impose interest withholding tax, allow large firms to avoid those taxes.